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Suppose there are only two countries, the USA and the UK. Each of them is producing only two goods, guns and butter. Using all of
Suppose there are only two countries, the USA and the UK. Each of them is producing only two goods, guns and butter. Using all of their resources, the maximum quantity of guns that they can jointly produce is 20 units. Alternatively, using all of their resources, the maximum quantity of butter that they can jointly produce is 30 units. (a) Draw their joint feasible frontier, place guns on the horizontal axis and butter on the vertical axis. (b) Now suppose the UK prefers to consume a combination of both commodities (guns and butter). Using your diagram from part 4(a), show and explain how the UK determines its optimal combination of guns and butter that it will produce and consume. (c) Draw a new joint feasible frontier as in part 4(a). Suppose the UK's reservation indifference curve intersects the feasible frontier at point A (5 units of guns and 25 units of butter) and B (15 units of guns and 10 units of butter). Using the joint feasible frontier and the UK's reservation indifference curve, show and explain the various combinations of guns and butter allocated between the UK and the USA that are Pareto optimal
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