Chapter 4, Problem 6MCQ

To determine

The question requires us to determine the terms of trade.

Explanation of Solution

The mutually beneficial terms of trade are found between the seller’s opportunity cost of producing a good and the buyer’s opportunity cost of the same good.

The following graph represents the production of wheat and textile in country A and country B:

Country	Wheat (bushels)	Textile
Country A	200	100
Country B	100	150

From the given table:

The opportunity cost of producing a bushel of wheat in country A

  $\begin{array}{l}=\frac{100}{200}\\ =\frac{1}{2}\text{unit of textile}\end{array}$

The opportunity cost of producing a bushel of wheat in country B

  $\begin{array}{l}=\frac{150}{100}\\ =1\frac{1}{2}\text{unit of textile}\end{array}$

So, the mutually beneficial terms of trade should be between ½ and 1½.

Option “c” is correct.