The Only Two Countries in the World, Alpha and Omega

question 53

Essay

The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
Alpha's Production Possibilities Frontier

Omega's Production Possibilities Frontier
a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. How much of each good would the countries produce?
b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now?
d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

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Definitions:

Cash Flow Growth Rate

The rate at which a company's cash flow from operations increases over a given time period.

Required Rate

The minimum rate of return expected by investors on an investment or project.

Growing Annuity

An annuity that increases at a proportionate rate during the period of the contract, typically to combat inflation.

Annuity Growth Rate

The rate at which the value of an annuity investment increases over time.