Canada produces MP3 players and lumber, and the horizontal axis for Canada's production possibilities frontier represents the amount of lumber produced

Question

Canada's borders are not initially open to trade, and the country consumes along its production possibilities frontier where the MRT and MRS equal the price ratio for the two products ($200 per 1,000 board-feet of lumber versus $100 per MP3 player). If Canada opens its borders to trade with China at world prices for the two goods ($300 per 1,000 board-feet of lumber and $100 per MP3 player), what happens in the Canadian economy? A) Canada will shift consumption along the original production possibilities frontier until MRT equals the world price ratio, and Canadians will consume less lumber and more MP3 players.
B) Canada will shift consumption along the original production possibilities frontier until MRT equals the world price ratio, and Canadians will consume more lumber and less MP3 players.
C) Canada will be able to trade with China, and the gains from trade allow Canada to afford bundles of the two goods that do not lie along the country's production possibilities frontier.
D) Canada may trade with China, but we do not have enough information to determine how the opening of the border will affect the trade decisions.

Answer 1

C