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September 14, 2021
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September 14, 2021

In the small country of Fictionia, there are 30 workers. Each worker can produce 4 shirts in one day, or bake 1 loaf of bread. These are the only two goods the can be produced.Part A) Draw the production possibility frontier (PPF) for Fictionia, showing the combinations of shirts (S) and bread (B) that can be produced in a day. Put shirts on the vertical axis. Label both intercepts, and label the curve as “PPF”.Part B) What is the equation for the production possibility frontier? You can derive this equation using the following idea:1. Let WS be the number of workers allocated to shirt production. What is the relationship between WS and NS, the number of shirts produced?2. Similarly, what is the relationship between WB, the number of workers allocated to bread production, and NB, the amount of bread produced?3. The total number of workers in Fictionia is 30. Use this information to derive an equation relating NS and NB.Part C) The consumption possibility frontier (CPF) describes the combinations of shirts and bread that Fictionia can feasibly consume in a day. On the same diagram as Part A, draw Fictionia’s CPF, assuming that it does not trade with any other country. Label this curve “CPF 1”.Part D) Suppose that the world price of bread is 3 shirts. So that 1 loaf of bread is sold for 3 shirts. What is the price of shirts, in loaves of bread? If Fictionia can trade any amount of shirts or bread at these prices, will it choose to trade with the rest of the world? If so, what will it export?Part E) Draw the CPF if Fictionia trades with the rest of the world. Label both intercepts, and label the curve as “CPF 2”.  

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