This Exercise Introduces the Concept of "Consumption Possibilities Frontier

question 116

Essay

This exercise introduces the concept of "consumption possibilities frontier." Suppose Argentina (A) and Bolivia (B) only trade with each other and they both produce the same two goods: grocery (G) and fish (F). Given its resources, Argentina can produce either 2 units of grocery per day or 1 unit of fish; Bolivia can produce either 5 units of grocery or 4 units of fish. The international price of fish is equal to the average of the opportunity costs of production in the two countries.
a. Draw the production possibilities frontiers for each country on separate graphs.
b. If Argentina specializes in the production of groceries and sells them all to Bolivia, how much fish could it buy from Bolivia?
c. If Bolivia specializes in the production of fish and sells it all to Argentina, how much groceries could it buy?
d. Based on the results of parts b and c, using the production possibilities frontier you drew in part a, draw the consumption possibilities frontier for each country. (A consumption possibilities frontier is a straight line that connects the maximum amount of fish and groceries that a country can afford to consume from its own production or from importing.)
d. Is there anything that might not be correct? (Hint: Is Argentina capable of buying all of Bolivia's fish production? Is Argentina capable of exporting as much groceries as Bolivia could import?)

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