# Suppose Canada’s Production Possibility Boundary

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