Question

Assume both Atlantis and Zanadu produce helmets and baseballs. Using equal amounts of resources, Atlantis can produce 100 helmets or 200 baseballs, whereas Zanadu can produce 100 helmets or 400 baseballs.
Required:
a. Assume both Atlantis and Zanadu experience constant opportunity costs in producing helmets and baseballs. Draw a correctly labeled graph illustrating the production possibilities curves (PPCs) for Atlantis and Zanadu, showing helmets on the horizontal axis and baseballs on the vertical axis. Plot the numerical values provided above on your graph.
b. Calculate the opportunity cost of one helmet for Atlantis. Show your work.
c. Which country has an absolute advantage in the production of baseballs?
d. Which country has a comparative advantage in the production of baseballs? Explain.
e. If Atlantis and Zanadu specialize based on comparative advantage and trade, would they be able to gain from trade if the terms of trade are 1 helmet for 3 baseballs? Explain.

Answer 1

Answer:

a) see attached image

b) Atlantis's opportunity cost of producing one helmet = 200 / 100 = 2 baseballs

c and d) Atlantis's opportunity cost of producing one baseball = 100 / 200 = 0.5 helmets

Zanadu's opportunity cost of producing one baseball = 100 / 400 = 0.25 helmets ⇒ Zanadu has a comparative and absolute advantage in the production of baseballs

e) yes, Atlantis would produce 100 helmets, and if it trades 50 to Zanadu, it will get 150 baseballs in return. So it will gain from trade. If Zanadu produces 400 baseballs and trades 150 of them for 50 helmets, it will also benefit.

Explanation: