Question

If Salem and Lynn were to trade belts and pens, what is the range of possible prices for a pen?

   Belts Pens

Salem    18    24

Lynn 18 36

a. 1/2 of a belt to 3/4 of a belt per pen

b. 3/4 of a belt to 1 belt 1 belt per pen

c. 1 belt to 2 belts per pen

d. 4/3 belts to 2 belts per pen

Answer 1

First we need to find what Salem and what Lynn would produce,

Opportunity cost of one Belt :-

For Salem = 24/12 = 4/3 pen = 1.33 pen

For Lynn = 36/18 = 2 pen

As, Opportunity cost of one belt for pen is lower for Salem. So Salem would produce belt. While Lynn would then produce pen.

As, Salem who is producing belt has a opportunity cost of belt = 4/3 pen. So he would exchange one belt for more than 4/3 pen at least or in other words he would want one pen for less than 3/4 belts.

Now, Lynn has a opportunity cost of pen = 18/36 = 1/2 belt

So, Lynn who is producing pen would exchange 1 pen for more than 1/2 belt at least.

So,

Salem wants 1 pen for less than 3/4 belts and Lynn wants to exchange 1 pen for more than 1/2 belts.

Hence, The range for possible price at which both will agree is when 1 pen can be exchanged for 1/2 of belt to 3/4 of belt.

• So, Option a. 1/2 of a belt to 3/4 of a belt per pen. is correct