This assignment is based on the scenario based in Chapter 3 involving Frank and Ruby. Make sure you answer the why parts of the questions. Use that information to complete the following questions: a. Give the Production Possibilities Frontier for both parties for both goods. b. What are the amounts chosen by both parties to produce for both goods before trading? Explain why they chose these amounts to produce.c. What are the amounts chosen by both parties to produce for both goods after trading? Explain why they chose these amounts to produce. Absolute Advantage: who has it and why.Comparative Advantage: who has it for each good and why.Opportunity costs for both parties for both products and why (how were they computed. You need to give the computations as part of your answer).Price for both goods that they agreed upon. How and why were the specific prices chosen?Why did they both agree to trade? Give at least 3 reasonThe book you need for this assigment is called, Principles of Microeconomics – 10th Edition, by N. Gregory Mankiw (2024). Published by Cengage Learning. Share on Facebook Tweet Follow us Sample Answer Understanding Trade Between Frank and Ruby In this essay, we will analyze the trading scenario between Frank and Ruby as presented in Chapter 3 of Principles of Microeconomics by N. Gregory Mankiw. We will explore the Production Possibilities Frontier (PPF), the choices made by both parties before and after trading, and delve into concepts such as absolute advantage, comparative advantage, opportunity costs, and the rationale behind their trading decisions. a. Production Possibilities Frontier (PPF) for Both Parties The PPF illustrates the maximum output possibilities for two goods that each party can produce given their resources. Assuming Frank can produce either Good A or Good B, and Ruby can produce the same, we can represent their PPFs graphically. – Frank’s PPF: Let’s assume Frank can produce 10 units of Good A or 5 units of Good B. His PPF would be a downward-sloping line connecting these two points. – Ruby’s PPF: Assume Ruby has the ability to produce 8 units of Good A or 4 units of Good B. Her PPF will also be a similar downward-sloping line. b. Production Choices Before Trading Amounts Produced – Frank: Before trading, Frank decides to produce 6 units of Good A and 2 units of Good B. – Ruby: Ruby chooses to produce 4 units of Good A and 2 units of Good B. Explanation Frank and Ruby chose these amounts based on their preferences and perceived needs. Frank may have valued Good A more than Good B, leading him to allocate more resources toward its production. Ruby might have found a balance in producing both goods due to her relatively lower productivity potential in each but a desire to maintain versatility in her offerings. c. Production Choices After Trading Amounts Produced After trading, let’s assume: – Frank: Produces 8 units of Good A and 1 unit of Good B. – Ruby: Produces 2 units of Good A and 3 units of Good B. Explanation After trading, both parties shift their productions to specialize according to their comparative advantages, leading to higher overall efficiency. Frank, with a comparative advantage in Good A, produces more of it and trades for Good B from Ruby, who has a comparative advantage in producing Good B. Absolute Advantage Definition: Absolute advantage refers to the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group. – Frank has an absolute advantage in producing Good A because he can produce more units than Ruby under the same resources. – Ruby has an absolute advantage in producing Good B for similar reasons. Comparative Advantage Definition: Comparative advantage is when an individual can produce a good at a lower opportunity cost than another individual. – Frank’s Comparative Advantage: He has a lower opportunity cost in producing Good A, as he gives up fewer units of Good B compared to Ruby. – Ruby’s Comparative Advantage: She has a lower opportunity cost in producing Good B, as she gives up fewer units of Good A compared to Frank. Opportunity Costs To calculate the opportunity costs: 1. Frank’s Opportunity Cost: – To produce one additional unit of Good A, he gives up 0.5 units of Good B (5/10). – To produce one additional unit of Good B, he gives up 2 units of Good A (10/5). 2. Ruby’s Opportunity Cost: – To produce one additional unit of Good A, she gives up 0.5 units of Good B (4/8). – To produce one additional unit of Good B, she gives up 2 units of Good A (8/4). Pricing Agreement The price agreed upon for each good would depend on the opportunity costs identified earlier. For instance, if they decided on trading 1 unit of Good B for 2 units of Good A, it reflects their comparative advantages and opportunity costs. Reasons for Trading Agreement Both parties agreed to trade for several reasons: 1. Increased Efficiency: By specializing based on comparative advantages, they can utilize their resources more effectively. 2. Greater Variety: Trading allows both parties to enjoy a greater variety of goods that they might not have produced enough of on their own. 3. Mutual Benefit: Both parties can achieve higher satisfaction levels by trading than they could have achieved alone through self-sufficiency. Conclusion The trading scenario between Frank and Ruby illustrates key economic principles such as absolute and comparative advantages, opportunity costs, and the benefits derived from trade. By understanding these concepts, we gain insights into how individuals can maximize their outputs and efficiencies through cooperative exchange. This question has been answered. Get Answer