Figure 3-5
Puneet's Production Possibilities Frontier Chirag's Production Possibilities Frontier
-Refer to Figure 3-5.At which of the following prices would both Puneet and Chirag gain from trade with each other?

Question

Figure 3-5
Puneet's Production Possibilities Frontier Chirag's Production Possibilities Frontier  
-Refer to Figure 3-5.At which of the following prices would both Puneet and Chirag gain from trade with each other?

Quizplus · Accepted Answer

Both Puneet and Chirag have different opportunity costs for producing wallets and purses. At a price of 3.75 purses for 5 wallets, Puneet would be willing to give up 1 purse to produce 5 wallets, while Chirag would be willing to give up only 0.5 purses to produce the same amount of wallets. This means that Puneet has a comparative advantage in producing wallets, while Chirag has a comparative advantage in producing purses. Therefore, at this price, Puneet can specialize in producing wallets and trade with Chirag for purses, and both can gain from the trade.

Figure 3-5 Puneet's Production Possibilities Frontier Chirag's Production Possibilities Frontier