Question

Assume Adia and Zardia can switch between producing wheat and producing beef at a constant rate:

In one hour, Andia can produce 3 Bushels of wheat and 5 pounds of beef.

In one hour Zardia can produce 4 bushels of wheat and 6 pounds of beef.

At which of the following prices would both Andia and Zardia gain from trade with each other? A - 6 bushels of wheat for 10.5 pounds of beef. B - 12 bushels of wheat for 19 pounds of beef. C - 24 bushels of wheat for 34 pounds of beef

Answer 1

Answer :-

Given :-

In one hour, Andia can produce 3 Bushels of wheat and 5 pounds of beef.

In one hour Zardia can produce 4 bushels of wheat and 6 pounds of beef.

First compare the opportunity cost(OC).

For Andia,

Opportunity cost(OC) of wheat = 5/3

= 1.67 beef

Opportunity cost (OC) of beef = 3/5

= 0.6 wheat

For Zardia,

Opportunity cost(OC) of wheat = 6/4

= 3/2

= 1.5 beef

Opportunity cost (OC) of beef = 4/6

= 2/3

= 0.67 wheat

By comparing we understand that Andia can make beef at a lower opportunity cost (OC) than Zardia (0.6 < 0.67), so Andia has comparative advantage in beef.

Zardia can make wheat at a lower opportunity cost than Andia ( 1.5 < 1.67),so Zardia has comparative advantage in wheat.

Andia will produce and export beef.

Zardia will produce and export wheat.

Trade between Andia and Zardia would be beneficial when, opportunity cost (OC) of beef lies between 0.6 and 0.67 and Opportunity cost of wheat lies between 1.5 and 1.67.

In option (A ). OC of wheat = 10.5/6 = 1.75 beef.

In option (B) OC of wheat = 19/12 = 1.58 beef.

In option (C) OC of wheat = 34/24 = 1.41 beef.

So in option (B) OC of wheat is 1.58 beef, which lies within the permissible range of 1.50 to 1.67, so (B) is correct.

therefore, Andia and Zardia will gain from the trade of 12 bushels of wheat for 19 pounds of beef.