Nations Quirk and Turk can produce aluminum and oil in the following maximum quantities when all of their resources are fully employed. Which one of the following terms of trade is most likely to produce exchange between the two nations?

Question

Nations Quirk and Turk can produce aluminum and oil in the following maximum quantities when all of their resources are fully employed.  Which one of the following terms of trade is most likely to produce exchange between the two nations?

Quizplus · Accepted Answer

The best choice is to trade 1 unit of oil for 0.4 units of aluminum. This is because the opportunity cost of producing 1 unit of aluminum is lower for Nation Quirk compared to Nation Turk, while the opportunity cost of producing 1 unit of oil is lower for Nation Turk compared to Nation Quirk. Therefore, by trading at a rate of 1 unit of oil for 0.4 units of aluminum, both nations can benefit from the trade by obtaining a good at a lower opportunity cost than producing it themselves.

Nations Quirk and Turk Can Produce Aluminum and Oil in the Following