Suppose Mexico can produce 5 autos or 10 corn.Suppose the United States can produce 4 autos or 20 corn.If opportunity costs are constant for both countries,which of the following would NOT be a potential terms of trade?
A)1 auto for 3 corn
B)1 auto for 4 corn
C)1 corn for 1/3 of an auto
D)1 corn for 1 auto

Question

Quizplus · Accepted Answer

Mexico has a comparative advantage in producing corn, as its opportunity cost of producing 1 corn is 1/2 auto, while for the US, the opportunity cost of producing 1 corn is 1/5 auto. Meanwhile, the US has a comparative advantage in producing autos, since its opportunity cost of producing 1 auto is 5 corn, while for Mexico, the opportunity cost of producing 1 auto is 2 corn. 
In order for a trade to benefit both countries and be mutually advantageous, the exchange rate must fall between the opportunity cost ratios for the two countries. 
Based on these opportunity cost ratios, potential terms of trade would fall between 1 auto for 2 corn (Mexico's opportunity cost ratio) and 1 auto for 5 corn (US's opportunity cost ratio). 
Therefore, options A, B, and C are all possible terms of trade. Option D, 1 corn for 1 auto, is not possible as it does not fall within the range of mutually advantageous exchange rates between the two countries.

Suppose Mexico Can Produce 5 Autos or 10 Corn