1. Specialization and production possibilities Suppose Armenia produces only scooters and pressure cookers. The resources that are used in the production of these two goods are specializedthat is, some resources are better suited for producing scooters than pressure cookers, whereas others are better suited for producing pressure cookers than scooters. The shape of Armenia's production possibilities frontier (PPF) should reflect the fact that as Armenia produces more pressure cookers and fewer scooters, the opportunity cost of producing each additional pressure cooker v . The following graphs show two possible PPFs for Armenia's economy: a straightline PPF(PPF1) and a bowedout PPF (PPFZ). Graph 1 Graph 2 PPF PPF 2 SCOOTERS SCOOTERS PRESSURE COOKERS PRESSURE COOKERS Based on the previous description, the tradeoff Armenia faces between producing pressure cookers and scooters is best represented by V 2. Comparative and absolute advantage Loc and Ashima are farmers. Each one owns a 14acre plot of land. The following table shows the amount of zucchini and watermelon each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing zucchini or watermelon or to produce zucchini on some of the land and watermelon on the rest. Zucchini Watermelon (Pounds per acre) (Pounds per acre) Loc 10 5 Ashima 18 6 On the following graph, use the blue line (circle symbol) to plot Loc's production possibilities frontier (PPF), and use the purple line (diamond symbol) to plot Ashima's PPF. ? 140 O 126 Loc's PPF 112 98 84 Ashima's PPF 70 WATERMELON (Pounds) 56 42 28 14 0 0 70 140 210 280 350 420 490 560 630 700 ZUCCHINI (Pounds) has an absolute advantage in the production of zucchini, and has an absolute advantage in the production of watermelon. Loc's opportunity cost of producing 1 pound of watermelon is pounds of zucchini, whereas Ashima's opportunity cost of producing 1 pound of watermelon is pounds of zucchini. Because Loc has a opportunity cost of producing watermelon than Ashima, has a comparative advantage in the production of watermelon, and has a comparative advantage in the production of zucchini.Glacier has a comparative advantage in the production of V , while Rainier has a comparative advantage in the production of V . Suppose that Glacier and Rainier specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total MC] million pounds of peas and C] million pounds of basil. Suppose that Glacier and Rainier agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 24 million pounds of peas for 24 million pounds of basil. This ratio of goods is known as the price of trade between Glacier and Rainier. The following graph shows the same PPF for Glacier as before, as well as its initial consumption at point A. Place a black paint (plus symbol) on the graph to indicate Glacier's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. Attempts I I Keep the Highest / 1 5. The price of trade Suppose that Croatia and Liechtenstein both produce olive oil and liquor. Croatia's opportunity cost of producing a case of liquor is 4 crates of olive oil while Liechtenstein's opportunity cost of producing a case of liquor is 12 crates of olive oil. By comparing the opportunity cost of producing liquor in the two countries, you can tell that v has a comparative advantage in the production of liquor and V has a comparative advantage in the production of olive oil. Suppose that Croatia and Liechtenstein consider trading liquor and olive oil with each other. Croatia can gain from specialization and trade as long as it receives more than V of olive oil for each case of liquor it exports to Liechtenstein. Similarly, Liechtenstein can gain from trade as long as it receives more than V of liquor for each crate of olive oil it exports to Croatia. Based on your answer to the last question, which of the following prices of trade (that is, price of liquor in terms of olive oil) would allow both Liechtenstein and Croatia to gain from trade? Check all that apply. [3 1 crate of olive oil per case of liquor [:1 16 crates of olive oil per case of liquor D 7 crates of olive oil per case of liquor [j 2 crates of olive oil per case of liquor