Chapter+3+-+Answers+YD

//YoDa Answer://


 *  GRAPH **

You can first have a good look on the production possibilities curve of these two firms by graphing them, using these two equations. (Here, the Violin takes the x-axis, and the Cello takes the y-axis.)

//// y = -4x + 16 -> 4 Violins (4,0); 16 Cellos (0,16).

//// y' = -2x' + 24 -> 12 Violins (12,0); 24 Cellos (0,24).

//Using each of the two points, the line above can be algebraically found.//





The Maestro has a lower opportunity cost of producing Cellos than does the Factory. For the Maestro, 1 Violin needs to be forgone to get 4 more Cellos. The cost of one Cello is 1/4 Violin. For Factory, 4 Violins must be forgone to get 8 more Cellos. The cost of one Cello is 1/2 Violin. Conversely, the Factory has a lower opportunity cost of producing Violins than does the Maestro. For the Factory, 8 Cellos must be given up to get 4 Violins. The cost of one Violin is 2 Violins. For the Maestro, 4 Cellos must be given up to get 1 Violin. The cost of one Violin is 4 Cellos.

TRADE RATIO **
 * 

__**//"Assumption"//**__


 * 2 Cello/ Violin (Factory) < X (Trade) < 4 Cello/ Vioin (Maestro)

IF "X" were 3 Cello/ Violin .......... the "Trade Ratio" would be --> 3 Cello PER Violin.**   //"This can also be solved using the other way://

1/4 Violin/ Cello (Maestro) < X (Trade) < 1/2 Violin/ Cello (Factory)

IF "X" were 1/3 Violin/ Cello ......... the "Trade Ratio" would be ---> 1/3 Violin PER Cello."

//These two may look different but they are saying the same thing.

3 Cello PER Violin = 1/3 Violin PER Cello.

Just divide the "3 Cellos" by 3 and "PER Violin" by 3 and see what happens.//





If we first look at the change in Total Production, we can see that though the number of Violins remain the same, the number of Cellos has increased by 4 instruments. Also, each firm, the Maestro and the Factory, has increased their production of Cello by 2 instruments.


 * //Back to the Trade Ratio,//**

How would this trade ratio benefit both the Maestro and the Factory?

1) Maestro gets 2 Violins in exchange of 6 Cellos. In other words, MAESTRO buys each Violin for a price of 3 Cellos. This price of Violin is lower than his opportunity cost for Violin, which is 4 Cellos.

2) Factory gets 6 Cellos in exchange of 2 Violins. In other words, FACTORY buys each Cello for the price of 1/3 Violins. This price of Cello is lower than the opportunity cost for Cello, which is 1/2 Violin.

Both of the firms would benefit as long as the trading price is between the range of opportunity costs (2 Cello/ Violin (Factory) and 4 Cello/ Vioin (Maestro)).