The cost of producing a car in Germany is 2,000 bushels of wheat,and the cost of producing a car in Canada is 1,200 bushels of wheat.The two countries can both benefit if the terms of trade are
A)greater than 2,000 of wheat per car
B)less than 1,200 bushels of wheat per car
C)between 1,200 bushels and 2,000 bushels of wheat per car,and Germany produces wheat
D)between 1,200 bushels and 2,000 bushels of wheat per car,and Germany produces cars
E)between 1,200 bushels and 2,000 bushels of wheat per car,and Canada produces wheat

Question

Quizplus · Accepted Answer

Germany produces wheat, so it can benefit from selling its wheat at a higher price than the cost of production (2,000 bushels per car). Canada produces cars more efficiently, so it can benefit from selling cars at a lower price than its cost of production (1,200 bushels per car). Therefore, the terms of trade should be between the cost of production for each country (1,200-2,000 bushels per car) to benefit both countries. Choice C is the only option that meets this criteria.

The Cost of Producing a Car in Germany Is 2,000