Question

Before Frank and Ruby engage in trade, each of them
a. consumes at a point inside his or her production possibilities frontier.
b. consumes at a point outside his or her production possibilities frontier.
c. consumes the same amounts of meat and potatoes as the other.
d. consumes at a point on his or her production possibilities frontier.

Answer 1

Before Frank and Ruby engage in trade, the situation is typically that each of them:

a. consumes at a point inside his or her production possibilities frontier.

This is because consuming at a point inside the production possibilities frontier (PPF) indicates that they are not fully utilizing their resources or capabilities, which is a common scenario before trade or specialization occurs. Trade allows them to specialize and move toward a more efficient allocation of resources, allowing them to consume at a point on or even beyond their individual PPFs through mutual gains from trade.