Suppose that a worker in Country A can produce either 25 bananas or 5 tomatoes each year. Country A has 200 workers. Suppose a worker in Country B can produce either 18 bananas or 6 tomatoes each year. Country B has 400 workers. Country A specializes in bananas and Country B specializes in tomatoes. Regarding the terms of trade, Country B will accept no _____ than _____ for every _____.
A) more; 3 bananas; one tomato
B) less; 3 bananas; one tomato
C) more; 1 tomato; 3 bananas
D) less; 1 tomato; 3 bananas

Question

Quizplus · Accepted Answer

Country B specializes in tomatoes, so it will have a comparative advantage in producing tomatoes. Therefore, it will want to export tomatoes and import bananas from Country A. To determine the terms of trade, we need to find the opportunity cost of producing tomatoes in each country. In Country A, the opportunity cost of producing one tomato is 5 bananas (25 bananas/5 tomatoes). In Country B, the opportunity cost of producing one tomato is 3 bananas (18 bananas/6 tomatoes). Therefore, Country B will accept no less than 3 bananas for every one tomato.

Suppose That a Worker in Country a Can Produce Either