uppose there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat. For Iowa the opportunity cost of producing 1 bushel of wheat is 3 bushels of corn. For Nebraska the opportunity cost of producing 1 bushel of corn is 3 bushels of wheat. At present, Iowa produces 20 million bushels of wheat and 120 million bushels of corn, while Nebraska produces 20 million bushels of corn and 120 million bushels of wheat. a. If each state specialized in their respective comparative advantage: Iowa would produce million bushels of corn and million bushels of wheat. Nebraska would produce million bushels of wheat and million bushels of corn. Now assume Nebraska trades 120 million bushels of wheat for 120 million bushels of corn. With specialization and this trade, Nebraska will end up with million bushels of corn and million bushels of wheat, while Iowa will end up with million bushels of corn and million bushels of wheat. b. If after trade, Nebraska actually end up with 40 million bushels of wheat and 120 million bushels of corn while Iowa actually end up with 40 million bushels of corn and 120 million bushels of wheat, and the person who arranges the trade (the trader) gets the remainder, how much would the trader get? The trader would get million bushels of wheat and million bushels of corn.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat. For Iowa the opportunity cost of producing 1 bushel of wheat is 3 bushels of corn. For Nebraska the opportunity cost of producing 1 bushel of corn is 3 bushels of wheat. At present, Iowa produces 20 million bushels of wheat and 120 million bushels of corn, while Nebraska produces 20 million bushels of corn and 120 million bushels of wheat.

a. If each state specialized in their respective comparative advantage:

Iowa would produce million bushels of corn and million bushels of wheat.

Nebraska would produce million bushels of wheat and million bushels of corn.

Now assume Nebraska trades 120 million bushels of wheat for 120 million bushels of corn. With specialization and this trade, Nebraska will end up with million bushels of corn and million bushels of wheat, while Iowa will end up with million bushels of corn and million bushels of wheat.

b. If after trade, Nebraska actually end up with 40 million bushels of wheat and 120 million bushels of corn while Iowa actually end up with 40 million bushels of corn and 120 million bushels of wheat, and the person who arranges the trade (the trader) gets the remainder, how much would the trader get?

The trader would get million bushels of wheat and million bushels of corn.

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