# Suppose Canada’S Production Possibility Boundary

Suppose Canada’s Production Possibility Boundary (PPB) is given by: O = 20 – 5W where O is the amount ofoil, and W the amount of wheat produced, each in millions of units. (a) Graph the PPB with oil on the vertical and wheat on the horizontal axis being sure to identify theintercepts. What is the numerical value of the slope of the PPB? [3](b) What is opportunity cost of producing more wheat when the economy is producing 2 units of wheatand 10 units of oil? What about when it is producing 2 units of wheat and 6 units of oil? Illustratethe production points in your diagram as part of your answer. [4](c) Suppose Canada is producing efficiently and can trade with the rest of the world at a fixed priceratio (a certain number of units of oil per unit of wheat). Is there a price ratio at which Canadawould not trade (or be indifferent as to whether it traded or not)? [3](d) Now imagine two price ratios at which Canada can trade: (i) 7 units of O per W or (ii) 1 unit of Oper W. What would Canada choose to produce under each price scenario? Briefly explain. [Hint: For each scenario identify Canada’s comparative advantage. ] [6](e) Illustrate Canada’s Consumption Possibility Boundary (CPB) for each of the price scenarios (again,identifying the intercepts). [2](f) Suppose Canada would choose to consume at the mid-point of the relevant CPB under each pricescenario. Calculate and illustrate these two consumption points on your diagram. Can youdetermine which scenario would be better for Canada? [4]Suppose the supply and demand curves for a particular product are given by: QS = -45 + 15PQD = 105 – 10P,where QS and QD are the quantities P is the price per unit. (a) Graph the supply and demand curves being sure to calculate and identify the P intercepts for bothand the Q intercept for the demand curve. [5](b) Calculate the quantities demanded and supplied at P = 4, and explain why P = 4 is not theequilibrium price. Illustrate in your diagram. [3](c) Calculate the equilibrium price and quantity. Identify these on your diagram. How much areconsumers spending on the good? [5](d) Suppose that, due to the entry of new producers, supply changes such that 25 additional units aresupplied at any given price. What is the equation of the new supply curve? Illustrate the newsupply curve in your diagram being sure to identify the new P intercept. [3](e) Calculate the new equilibrium price and quantity and identify it on your diagram. Has the quantitytraded (equilibrium quantity) increased by 25? Explain. [6]