The graph above shows the PPC for a country that can produce oil,which is labor intensive,or televisions,which are capital intensive.
The country is currently producing at point A and not trading with the rest of the world.With trade,the world price can be represented by slope of the straight line through Point A.
Which of the following is a true statement?
A)When this country produces the optimal amount with trade, workers in this country will be better off.
B)When this country produces the optimal amount with trade, capital in this country will be better off.
C)When this country produces the optimal amount with trade, both factors of production will be better off.
D)When this country produces the optimal amount with trade, the income of factors of production will not change.

Question

The graph above shows the PPC for a country that can produce oil,which is labor intensive,or televisions,which are capital intensive.
The country is currently producing at point A and not trading with the rest of the world.With trade,the world price can be represented by slope of the straight line through Point A.
Which of the following is a true statement?
A)When this country produces the optimal amount with trade, workers in this country will be better off. 
B)When this country produces the optimal amount with trade, capital in this country will be better off. 
C)When this country produces the optimal amount with trade, both factors of production will be better off. 
D)When this country produces the optimal amount with trade, the income of factors of production will not change.

Quizplus · Accepted Answer

When a country trades with the rest of the world, it can specialize in producing the good in which it has a comparative advantage, leading to an increase in efficiency and output. The optimal amount for the country to produce with trade is represented by the point where the world price line is tangent to the PPC (point B in the graph). At this point, the country produces more than it was producing without trade and can consume a combination of both goods that lies outside its original PPC. This means that workers in the country will see an increase in their wages as the production of the labor-intensive good (oil) increases. Therefore, statement A is true while statements B, C, and D are false.

The Graph Above Shows the PPC for a Country That