HANDOUT 2: Non-Linear Production Possibility Curves

Comparative Advantage Experiment II

One of you is the U.S. Trade Representative while the other is the Trade Representative for Mexico in a world that only has these two countries. You are responsible to your nation's citizens relative to optimizing their access to two goods -- beer and pretzels.

_____________________ Is the U.S. trade representative in our world (put your name)

_____________________ Is the Mexican trade representative in our world (put your name)

The United States has a production possibilities frontier that implies production of beer of either 15, 14, 12, 9, 5, or 0, in combination of the production of pretzels of 0, 1, 2, 3, 4, or 5. Mexico has a production possibilities curve allowing for production of pretzels of 10, 9, 7, 4, or 0, corresponding to production of beer of 0,1, 2, 3, or 4. Draw the corresponding curves in the graphs below.

1) How many of each product should each country produce to maximize joint production assuming that they will trade to acquire internal preferences for the goods?

2) Our terms of trade are ______ beer for ______ pretzels

3) Fill in your personal preferences for the combination of the two goods that will be available for consumption after trade.

(your preferences need not imply integer numbers of trucks and computers)