(Table: Production Possibilities for the United States and Mexico) Usingthe table on Production Possibilities for the United States and Mexico,assume each country specializes in the good for which it has a comparativeadvantage. Which of the following answers identifies a trade price thatboth countries would find acceptable?
(Units are in tons.)

Question

Quizplus · Accepted Answer

According to the principle of comparative advantage, each country should specialize in producing the good for which it has a lower opportunity cost. In this case, the United States has a lower opportunity cost for producing corn, while Mexico has a lower opportunity cost for producing potatoes. Therefore, the United States should produce corn and Mexico should produce potatoes. The acceptable trade price would fall within the range where both countries benefit from trade. In option C, the trade price range is between five corns for one potato and eight corns for one potato, which means that for every potato that Mexico produces, it can trade for between five and eight corns with the United States. This trade price falls within the acceptable range for both countries to benefit from trade.