The following figure depicts four different scenarios in which the blue line represents California's production possibilities curve (PPC) and the red line represents Texas' PPC. These two states trade wine and cloth.

-Refer to the figure above.In what scenario would the terms of trade of cloth for wine be between 1 and 1.25?

Question

The following figure depicts four different scenarios in which the blue line represents California's production possibilities curve (PPC) and the red line represents Texas' PPC. These two states trade wine and cloth.
 
-Refer to the figure above.In what scenario would the terms of trade of cloth for wine be between 1 and 1.25?

Quizplus · Accepted Answer

In scenario 3, California and Texas are producing wine and cloth at similar opportunity costs. Therefore, the terms of trade (the ratio at which they exchange wine for cloth) would be close to 1, with the possibility of Texas getting slightly more cloth in exchange for their wine, putting the terms of trade between 1 and 1.25. This is because, for Texas to produce more cloth, they have to give up producing more wine, and since their opportunity cost of producing cloth is higher than California's, they would demand a slightly greater amount of cloth in exchange for their wine.

The Following Figure Depicts Four Different Scenarios in Which the Blue