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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage,

a. they both obtain consumption outside their production possibilities frontier.

b. they both obtain consumption inside their production possibilities frontier.

c. one individual consumes inside her production possibilities frontier, while the other consumes outside hers.

d. each individual consumes a point on her own production possibilities frontier.

To determine
Comparative advantage and production possibility frontier.

Explanation

Option (a):

If two parties produce efficiently and trade based on comparative advantage and both are mutually benefitted from trade, then they are able to gain from the trade by comparative advantage. It is also possible to achieve consumption outside their PPF. So, option ‘a’ is correct.

Option (b):

They consume inside their PPF only if the parties do not produce their goods efficiently and does not trade...

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