The figure below shows the potential gains from specialization for farms in Idaho and Iowa.

-Refer to the figure above.Which of the following terms of trade will result in mutual gains for both Idaho and Iowa?

Question

The figure below shows the potential gains from specialization for farms in Idaho and Iowa.
 
-Refer to the figure above.Which of the following terms of trade will result in mutual gains for both Idaho and Iowa?

Quizplus · Accepted Answer

According to the figure, Idaho has a comparative advantage in producing alfalfa and Iowa has a comparative advantage in producing corn. For mutual gains, both states should specialize in producing the product in which they have a comparative advantage and then trade with each other. As per the given options, Choice C will result in mutual gains for both states because Iowa can produce 20 bushels of corn with the same resources it would take to produce one ton of alfalfa, while Idaho can produce one ton of alfalfa with the same resources it would take to produce only 40 bushels of corn. Therefore, Iowa can offer 20 bushels of corn for 1 ton of alfalfa and Idaho can benefit from trading it.

The Figure Below Shows the Potential Gains from Specialization for Farms