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Economics - Macrotown and Microtown Case Study

The countries of Macrotown and Microtown have the production possibilities tables for sheep and hogs shown in the tables below. Without trade Macro would produce at Alternative D and Micro would also produce Alternative D. Note that the costs of producing sheep and hogs are constant in both countries.

Macrotown Production Possibilities Table
Product Alternative
(lbs) A B C D E F
Sheep 25 20 15 10 5 0
Hogs 0 5 10 15 20 25

Microtown Production Possibilities Table
Product Alternative
(lbs) A B C D E F
Sheep 20 16 12 8 4 0
Hogs 0 3 6 9 12 15

(a) In Macro, the cost of producing:
5 units of sheep is ______ hog units.
1 unit of sheep is ______ hog units.
(b) In Micro, the cost of producing:
4 units of sheep is ______ hog units.
1 unit of sheep is ______ hog units.

(c) Which country has the comparative advantage in sheep production and which country has the comparative advantage in hog production?

(d) If each nation specializes in the product where it has a comparative advantage and trades with the other, what will be the limits to the terms of trade for each sheep unit?

(e) If the nations do not specialize and trade but remain at alternative D in Macro and D in Micra, the combined production of Macro and Micra will be how many sheep and how many hogs?

(f) However, if the two nations specialize, the combined production of Macro and Micra will be how many sheep and how many hogs?

(g) What will be the total gain of sheep and hogs if the countries specialize and trade?

(c) Which country has the comparative advantage in sheep production and which country has the comparative advantage in hog production?

(d) If each nation specializes in the product where it has a comparative advantage and trades with the other, what will be the limits to the terms of trade for each sheep unit?

(e) If the nations do not specialize and trade but remain at alternative D in Macro and D in Micra, the combined production of Macro and Micra will be how many sheep and how many hogs?

(f) However, if the two nations specialize, the combined production of Macro and Micra will be how many sheep and how many hogs?

(g) What will be the total gain of sheep and hogs if the countries specialize and trade?

Solution Preview

a.) Macro: 5 units of sheep is 5 hog units.
1 unit of sheep is 1 hog units.

b.) Micro: 4 units of sheep is 3 hog units.
1 unit of sheep is 3/4 hog units. ...

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