Question

1. Use the following table to answer the question below.

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 Simon are ______ pounds of green beans and ______ pounds of corn with trade and specialization.

1. 40,40
2. 0,40
3. 20,20
4. 40,0

Answer 1

	Green Beans	Corns
Dave	80	160
Simon	160	80

Dave can produce either a maximum of 80 pounds of green beans or 160 pounds of corns

Simon can produce either a maximum of 160 pounds of green beans or 80 pound of corns.

	Opportunity cost of producing Green Beans in terms of Corns	Opportunity cost of producing corns in terms of green beans
Dave	(160 / 80) = 2 corns	(80 / 160 ) = 0.5 green beans
Simon	(80 / 160) = 0.5 corns	(160 / 80) = 2 green beans

Dave's opportunity cost of producing corns is less than the Simon's opportunity cost of producing corns . It means Dave has a comparative advantage in the productio of corns. Therefore, Dave will produce only corns and maximum amount of corn Dave can produce is 160 pounds.

Simon's opportunity cost of producing green beans is less than the Dave's opportunity cost of producing gree beans. It means Simon has a comparative advantage in the production of green beans. Therefore, Simon will produce only green beans and maximum amount of green beans Simon can produce is 160 pounds.

Thus, after specialization Dave will produce 160 pounds of corns and Simon will produce 160 pounds of green beans.

Terms of trade are 1 pounds of green beans for 1 pounds corn

If Simon sells Dave 80 pounds of green beans and in return gets 80 pounds of corn.

So, after trade Dave will have 80 pounds of green beans and 80 pounds of corn, and Simon will have 80 pounds of green beans and 80 pounds of corns.

Initial consumption:

Dave consumes 40 pounds of green beans and 80 pounds of corn without trade

Simon consumes 80 pounds of green beans and 40 pounds of corn without trade

If 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.

Answer: Option (B)