Question

Use the following table to answer the question.

Dave's Production Possibilities Schedule		Simon's Production Possibilities Schedule
Pounds of Green Beans	Pounds of Corn	Pounds of Green Beans	Pounds of Corn
0	160	0	80
20	120	40	60
40	80	80	40
60	40	120	20
80	0	160	0

Assume Dave consumes 40 pounds of green beans and 80 pounds of corn without trade. Also, assume that Simon consumes 80 pounds of green beans and 40 pounds of corn without trade. Suppose Simon and Dave specialize and that the terms of trade are 1 pound of green beans for 1 pound of corn. If Simon sells Dave 80 pounds of green beans, then the gains from trade for Dave are ________ pounds of green beans and ________ pounds of corn with trade and specialization.

Group of answer choices

0, 40

20, 20

40, 40

40, 0

Answer 1

Answer:- correct option is (A).(0,40)

Calculate the opportunity cost

	1 pound of green Bean	1 pound of corn
Dave	2 pounds of corn	0.5 pound of green beans
Simon	0.5 pound of corn	2 pounds of green beans

Dave has comparative advantage in producing Corn and Simon has comparative advantage in producing green beans.

	Dave	Simon
	Green beans	Corn	Green beans	Corn
Without trade
Production	40	80	80	40
Consumption	40	80	80	40
After specialization
Production	0	160	160	0
Trade	+80	-80	-80	+80
Consumption	80	80	80	80
Gain from trade
Increase	40	0	0	40

Earlier Simon was having 80 beans and 40 corn. Since he specializes in beans, he will now produce 160 beans and no corn. Dave will produce 160 corn and no beans. As the terms of trades are 1 corn for 1 bean, when Dave sells Simon 80 corn, Simon will give Dave 80 beans. So at the end, Simon has 80 beans and 80 corn. Initially Simon had 80 beans and 40 corn and now he has 80 beans and 80 corn.

Simon sells Dave 80 pounds of green beans, then the gains from trade for Simon are 0 pounds of green beans and 40 pounds of corn with trade and specialization.