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. Draw the production possibilities frontier for each country. 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." Suppose the countries specialize. Which country will produce cars? Show the equation you used to come to the answer Once they specialize, suppose they work out a trade of 2 million cars for 6 tons of paper. Find new consumption point for each country and label it "B".

Attached grap with point A and B.

Explanation:

Russia will produce the cars as their production has te lower opportunity cost:

(Note: Opportunity cost is the amount of production resigned for the current output)

Sweden pportunity cost for production car:

25 ton of papper / 5 m cars = 5 tons per millon of cars

Russia pportunity cost for production car:

8 ton of papper / 4 m cars = 2 tons per millon of cars

With the trade set at 2 millon car for 6 tons of paper we get the following

Sweden produce 25 tons - 6 traded = 19

and receive 2 millon car

Russia produce 4 millon car - 2 traded = 2

and receive 6 tons of pappers

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