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.Which of the following statements is true of the terms of trade of tea for coffee?

Question

Quizplus · Accepted Answer

The terms of trade will be beneficial for both Hawaii and South Carolina if they lie between the opportunity cost of producing tea in Hawaii (2 pounds of coffee) and the opportunity cost of producing tea in South Carolina (1/3 pound of coffee). Therefore, the terms of trade will lie somewhere between 1/3 and 2.

Scenario: Hawaii and South Carolina Are Trading Partners