Question

There are 13000 units of productive capacity in the Eldorado.

Let Y = 0 + 0.07 X be the cotton production function.

Let Y = 0 + 0.35 X be the iron production function.

There are 10000 units of productive capacity in the Noplacia.

Let Y = 0 + 0.05 X be the cotton production function.

Let Y = 0 + 0.026 X be the iron production function.

The two countries will engage in international trade, if the international terms of trade are ________ tons of cotton per ton of iron

a. 3.8 b .1.8 c. 2.8 d. 2.5 e.3.5

Answer 1

cotton production in Eldorado when only produce cotton and no Iron

Y = 0 + 0.07 X

Y = 0.07*13000 = 910

Iron production in Eldorado when only produce Iron and no cotton:

Y = 0 + 0.35 X

Y = 0.35*13000 = 4550

The opportunity cost of producing 4550 units of iron = 910 unitof cotton.

So opportunity cost of producing 1 unit of iron = 0.2 unit of cotton.

cotton production in Noplacia when only produce cotton and no Iron

Y = 0 + 0.05 X

Y = 0.05*10000 = 500

Iron production in Noplacia when only produce Iron and no cotton:

Y = 0 + 0.026 X

Y = 0.026*10000 = 260

The opportunity cost of producing 260 units of iron = 500 units of cotton.

So opportunity cost of producing 1 unit of iron = 1.9 unit of cotton.

If the two countries will engage in international trade, if the international terms of trade must be in between 0.2 to 1.9 tons of cotton per ton of iron

So here according to the given option the term of trade is 1.8

Ans is b) 1.8