Product/011 Possibility Curve WS I

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Kl pLea de, N;g,I farage MEP was , stm"g pro~"'"' of;he ''"" ,;d,' ;" BriO;" '; """"dom s•Y "' "" '°
t e EU. (Credit: Gage Skidmore/ Flickrl CC BY-SA 2.0)

Some '"" ;a;d ;h,s Jo" 23,d, 2016 w;11 go dm,o • a,;m;" '; ;"d'P'"'"" &y, boS ••"Y ,;hen h•"' ~" ICSS
positive about Britain's decision to leave the European Union. Financial markets, facing new found uncertainty,
plo"~d-The P'""' foll h"' •~;"; she doll" oo • lO·Y"' low of $1 Jl ,.;; ~d;;o" h• ""''° opp lo mili<.
world economy, noticeably in Europe where Britain provided strong consumption for European goods. The Brexit
"" """' """"';"" ;" m•"Y of she wodd '; marl«• If Bri•;", lo"g • chomp;," off"' trade, "" "" " ,e,oke
• "'""'I ;;,de ~•I, how m,ch r,;,h "" b,s;""'" wocldw ;~ P" ;" ,she, ;"rem,;;oo, I ecooom;c ,g,e,m e""'

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''"" '°""'" Roils Royce, de;;g""•dis,;bose,, cod m~""°'""' of pw" syssems foe ";,;;o" '"' focm" •""
of car brands hke Bentley. Rolls Royce sold Bentley (now owned by Volkswagen) in 1971 , let's assume they want to
re-enter the market with 'Rolls Royce' branded vehicles.
Assume Rolls Royce can produce two things, aircraft parts, which they sell to /inns like Airbus, Boieng etc. Or car
arts, which they can uses to manufacture cars.

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In 1971: Rolls _Royce sol_d rights to Bentely following financial problems stemming from the costs of d I · o h
RB21 I Jet engine. (Credit: Rachel Patterson/ Flickr/ CC BY-NC-ND 2.0) eve opin:, e

I. RollsonRoyce
parts can produce
the y-axis either
and aircraft 50 car
parts parts
on the JOO aircraft
x-~xis. artsR' or a;;mbmat1on_
Draw R:ils . . or both. Represent cars
the PPF is linear. oyce Fon the diagram below. Assume
I
Rolls Royce PPF
120

110

100

90

80

fJ) 70
t::
C1l
a.. 60
....
C1l
l)
50

40

30

20

10

0
0 10 20 30 40 50 60 70 80 90 100 110 120
Aircraft Parts

2. For Rolls Royce, what is the marginal opportunity cost of I aircraft part? I car part? \ CoJ Pc;;.(\--
\ " l c;i r Ua,r t- 1,"-''
3. If Rolls Royce needs to produce 40 aircraft parts, how man y car parts can they make? .J.S-
After exploring the market, Rolls Royce finds that Volkswagon is also producing both car parts and aircraft parts and
may be open to trade. Rolls Royce wants to consider the benefits of trading with this firm.

4. Volkswagon can produce either 120 car parts, 40 aircraft parts, or a combination or both. Represent cars
parts on the y-axis and aircraft parts on the x-axis. Draw Volkswagon's PPF on the diagram below, and
redraw Rolls Royce's PPF from question I. Assume both PPFs are linear.
 120 Rolls Royce & V lk
o swagon PPF
110

100

90

80
(/)
t: 70
(1;l

...
Q.
(1;l
60
(.)
50

40

30

20

10

0
0 10 20 30 40 50 60 70 80 90 -100 110 120
Aircraft Parts

5. For Volkswagon, what is the marginal opportun ity cost of I aircraft pa rt? I car part? 1l et \l t,/ f

6. Who has the absolute advantage in the production of aircraft pa rts? Ca r parts? 1, (' . ,, (
1
7. Who has the comparative advantage in the production ofairc raf) r arts?. Ca r parts? Why?
1r~,,,,.,.,J,J l(t· '/' 1 '" 1·'
8. Assume each firm needs 20 aircraft pa rts and cannot trade. How many caf parts is each able to produce '; '
after making 20 ai rcraft parts? What is the tota l amount of car parts produced?
\1v ~)... 1r.1.;,_ t
9. If the market is opened up to trade, represent the efficient production of 40 aircraft parts on the PPF.
What is the total number of ca r parts produced now?

Vehicles and aircraft are two ofBritain 's largest exports, 1ogether making up 17.7% of the Iota!. Although final
assembly of · e u I chains often span !he globe. Bumpers for some Bentley
ve for inspec1ion before going 10 Gemiany for
ly. Brexil would mean imposing lari ffs (laxes on
Rolls Royce if !hey wan1ed 10 trade wi1h