Question

Suppose that making a lamp takes 10 hours in Alphaland and 5 hours in Betaland. And also suppose that making a footstool takes 20 hours in Alphaland and 5 hours in Betaland.  Assume as well that labour is the only productive resource needed in these industries, and is fully employed in both nations.    

Now Alphaland produces 1 more lamp (and decreases its production of footstools), and Betaland produces 1 less lamp (and increases its production of footstools).

Using the above information, answer the following questions by selecting the correct answer.

The net gain or net loss in the combined output of footstools would be equal to ____________.	Answer 1Choose...zero lamps5 lampsa net gain0.5 footstoolsno change15 footstools2 footstools1 lamp1 footstoola net loss
There would there be _______ in the combined output of footstools.	Answer 2Choose...zero lamps5 lampsa net gain0.5 footstoolsno change15 footstools2 footstools1 lamp1 footstoola net loss
There would there be _______ in the combined output of lamps.	Answer 3Choose...zero lamps5 lampsa net gain0.5 footstoolsno change15 footstools2 footstools1 lamp1 footstoola net loss
The net gain or net loss in the combined output of lamps would be equal to ____________.

Answer 1

Let us suppose there are 100 labor hours in each country.

Now, Alphaland takes 10 hours to produce 1 lamp and 20 hours to produce 1 footstool. Thus, Alphaland can produce either 10 lamps or 5 footstools. Now, plotting lamps on y-axis and footstools on x-axis, production possibility frontier for Alphaland has a vertical intercept of 10 and a horizontal intercept of 5.

Similarly, Betaland takes 5 hours to produce 1 lamp and 5 hours to produce 1 footstool. Thus, Betaland can produce either 20 lamps or 20 footstools. Now, plotting lamps on y-axis and footstools on x-axis, production possibility frontier for Alphaland has a vertical intercept of 20 and a horizontal intercept of 20.

Here, as Alphaland produces 1 more lamp (say from 5 to 6 lamps), number of footstools decreases from 2.5 to 2 footstools. Here, opportunity cost of producing 1 lamp in Alphaland = 5/10 = 0.5 footstools (negative value).

Similarly, as Betaland produces 1 less lamp (say from 10 to 9 lamps), number of footstools increases from 10 to 11 footstools. Here, opportunity cost of producing 1 lamp in Betaland = 20/20 = 1 footstool (positive value).

Thus, net gain from combined output of footstools = 1 footstool - 0.5 footstools = 0.5 footstools.

Again, net gain from combined output of lamps = 1 lamp - 1 lamp = 0 lamps.

There would be an increase of 0.5 footlamps in the combined output of footlamps.

There would be no change in the combined output of lamps.