Problem

Suppose Russia and Sweden each produce only paper and cars. Russia can produce 8 tons of paper or 4 million cars each year. Sweden can produce 25 tons of paper or 5 million cars each year.

a. Draw the production possibilities frontier for each country.

b. Both countries want 2 million cars each year and as much paper as they can produce along with 2 million cars. Find this point on each production possibilities frontier and label it "A."

c. Suppose the countries specialize. Which country will produce cars?

d. Once they specialize, suppose they work out a trade of 2 million cars for 6 tons of paper. Find the new consumption point for each country and label it "B."