Figure 18-7

-In Figure 18-7, CF has the same slope as BG.AB and CD are the production possibilities of Pestoland and Pastaland, respectively.If both countries are given the opportunity to trade at prices indicated by CF,
A) both will refuse trade.
B) both will agree to trade.
C) Pestoland will wish to trade, but Pastaland will not.
D) Pastaland will wish to trade, but Pestoland will not.

Question

Figure 18-7
 
-In Figure 18-7, CF has the same slope as BG.AB and CD are the production possibilities of Pestoland and Pastaland, respectively.If both countries are given the opportunity to trade at prices indicated by CF,
A) both will refuse trade. 
B) both will agree to trade. 
C) Pestoland will wish to trade, but Pastaland will not. 
D) Pastaland will wish to trade, but Pestoland will not.

Quizplus · Accepted Answer

The opportunity cost of producing a good in Pestoland is higher than in Pastaland for good X, and the opportunity cost of producing a good in Pastaland is higher than in Pestoland for good Y. Therefore, both countries have a comparative advantage and can benefit from trade. Both countries will agree to trade since Pestoland can specialize in producing good Y and Pastaland can specialize in producing good X, both countries can then trade with each other at the prices indicated by CF, leading to an increase in total production possibilities for both countries.

Figure 18-7 -In Figure 18-7, CF Has the Same Slope as BG.AB