Both Canada and the United States produce lumber and music CDs with constant opportunity costs. The United States can produce either 10 tons of lumber and no CDs, or 1,000 CDs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no CDs, or 400 CDs and no lumber, or any combination in between.
a. Draw the U.S. and Canadian production possibility frontiers in two separate diagrams, with CDs on the horizontal axis and lumber on the vertical axis.
b. In autarky, if the United States wants to consume 500 CDs, how much lumber can it consume at most? Label this point A in your diagram. Similarly, if Canada wants to consume 1 ton of lumber, how many CDs can it consume in autarky? Label this point C in your diagram.
c. Which country has the absolute advantage in lumber production?
d. Which country has the comparative advantage in lumber production? Suppose each country specializes in the good in which it has the comparative advantage, and there is trade.
e. How many CDs does the United States produce? How much lumber does Canada produce?
f. Is it possible for the United States to consume 500 CDs and 7 tons of lumber? Label this point B in your diagram. Is it possible for Canada at the same time to consume 500 CDs and 1 ton of lumber? Label this point D in your diagram