Scenario: Hawaii and South Carolina are trading partners. Hawaii has an absolute advantage in the production of both coffee and tea. The opportunity cost of producing 1 pound of tea in Hawaii is 2 pounds of coffee, and the opportunity cost of producing 1 pound of tea in South Carolina is 1/3 pound of coffee.
-Refer to the scenario above.If both nations decide to trade,which of the following statements is true?

Question

Quizplus · Accepted Answer

Hawaii has an absolute advantage in producing both coffee and tea, but it has a lower opportunity cost in producing coffee than tea (1 pound of tea costs 2 pounds of coffee to produce in Hawaii). On the other hand, South Carolina has a lower opportunity cost in producing tea than coffee (1 pound of tea costs only 1/3 pound of coffee to produce). Therefore, to maximize the gains from trade, Hawaii should specialize in producing coffee and export it to South Carolina, while South Carolina should specialize in producing tea and export it to Hawaii. This way, both countries can gain from trade by obtaining goods at a lower opportunity cost than if they had to produce them domestically.

Scenario: Hawaii and South Carolina Are Trading Partners