Question

Output produced in one growing season:

Corn Soybeans

Iowa 30 45

Nebraska 40 80

Iowa and Nebraska can both produce corn and soybeans, and can switch between the production of corn and soybeans at a constant rate. The table illustrates the amount of corn or soybeans each state can produce in one growing season. Answer the following questions:

a.)  From the table we know that Iowa has a:

a. comparative advantage in the production of soybeans and Nebraska has a comparative advantage in the production of corn

b. comparative advantage in the production of corn and Nebraska has a comparative advantage in the production of soybeans

c. comparative advantage in both goods and Nebraska has a comparative advantage in neither good

d. comparative advantage in neither good and Nebraska has a comparative advantage in both goods.

b.) From this table, we can conclude that Iowa should specialize in the production of

a. both goods and Nebraska should specialize in the production of neither good

b. neither good and Iowa should specialize in the production of both goods

c. corn and Nebraska should specialize in the production of soybeans

d. soybeans and Nebraska should specialize in the production of corn

c.) At which of the following prices would both Iowa and Nebraska be able to gain from trade with each other?

a. ​1 bushel of soybeans for 1.7 bushels of corn

b. ​2.5 bushels of soybeans for 1 bushel of corn

c. ​3 bushels of corn for 1 bushel of soybeans

d. ​1.8 bushels of soybeans for 1 bushel of corn

Answer 1

a) Iowa can produce either 30 corn or 45 soyabean. So opportunity cost to produce one corn is 45/30= 1.5 soyabean.

Similarly opportunity cost of producing one soyabean is 30/45=0.67 corn.

The opportunity cost of producing one corn in Nebraska is 80/40=2 soyabean while the opportunity cost of producing one soyabean is 40/80=1/2=0.5 corn.

So Iowa has the comparative advantage in production of corn as its opportunity cost to produce one corn is less than Nebraska and Nebraska has the comparative advantage in production of soyabean as it has a lower opportunity cost as compared to Iowa.

Answer from given options is option B) Iowa has comparative advantage in corn while Nebraska has in soyabean

b) From the given table , we see that Iowa should specialise in production of corn while Nebraska should specialise in production of soyabean since they have less opportunity cost in these goods.

Answer is option C) corn and Nebraska in soyabean

c) The trade should be between 1.5 to 2 bushels of soyabean while the trade in corn should be between 0.67 to 0.5 bushels of corn for one bushel of soyabean.

So answer from the given options is option D) 1.8 bushels of soyabean for one bushel of corn.

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