Draw the consumption possibility frontier for fictionia

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Reference no: EM132200135

Question: In the small country of Fictionia, there are 30 workers. Each worker can produce 4 shirts in one day, or bake 1 loaf of bread. These are the only two goods the can be produced.

(a) Draw the consumption possibility frontier (CPF) for Fictionia, showing the combinations of shirts (S) and bread (B) that can be feasibly consumed in a day. Put shirts on the vertical axis. Label both intercepts, and label the curve as CPF 1.

(b) Fictionia begins to trade with the rest of the world. It learns that the rest of the world uses World Dollars as currency. A shirt is worth 1.50 dollars, and a loaf of bread is worth 4.50 dollars. Draw Fictionia's CPF if it trades with the rest of the world. Label both intercepts, and label the curve as CPF 2. Mark and label a point on the diagram that represents Fictionia's Production.

(c) Suppose that the prices of both goods double, so a shirt is now worth $3 and a loaf of bread is worth $9. Describe how Fictionia's CPF changes.

(d) The price of shirts stays at $1.50, but the price of bread begins to fall. What happens to Fictionia's gains from trade? Will it change its decision of which good to export, if the price of bread keeps falling?

Reference no: EM132200135

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