The accompanying figure shows the annual production possibilities curve for a small country that is open to trade with the rest of the world. Suppose the world price of cashews is $12 per pound, and the world price of mangos is $4 per pound. As indicated in the figure, at these prices, this country will produce 21,000 pounds of mangos and 5,000 pounds of cashews each year. Suppose that the residents of this country are allergic to cashews and only want to consume mangos. Given that this country is open to trade with the rest of the world, how many mangos in total can its residents consume each year?

Question

The accompanying figure shows the annual production possibilities curve for a small country that is open to trade with the rest of the world. Suppose the world price of cashews is $12 per pound, and the world price of mangos is $4 per pound. As indicated in the figure, at these prices, this country will produce 21,000 pounds of mangos and 5,000 pounds of cashews each year.  Suppose that the residents of this country are allergic to cashews and only want to consume mangos. Given that this country is open to trade with the rest of the world, how many mangos in total can its residents consume each year?

Quizplus · Accepted Answer

Since the residents of this country are allergic to cashews, they will choose to sell them all on the world market, which will earn them a revenue of $60,000 (= 5,000 × $12). With this money, they can purchase $60,000/$4 = 15,000 pounds of mangos, and together with the 21,000 pounds of mangos they grow, they will have 36,000 pounds of mangos.

The Accompanying Figure Shows the Annual Production Possibilities Curve for a Small