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Fact 2.4.2
Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour.
-Complete the following sentence. Given Fact 2.4.2,
A)there will be gains from trade, no matter what Brenda and Agnes specialize in, as long as they specialize.
B)there will be gains from trade only if Agnes specializes in the production of Y and Brenda in X.
C)there will be gains from trade only if Agnes becomes faster at producing X.
D)there will be no gains from trade because Agnes has an absolute advantage.
E)there will be gains from trade if Agnes specializes in the production of X and Brenda in Y.

Question

Quizplus · Accepted Answer

Agnes has an absolute advantage in both X and Y, but Brenda has a comparative advantage in Y. This means that Brenda has a lower opportunity cost of producing Y relative to X compared to Agnes. Therefore, if Agnes specializes in X and Brenda in Y, there will be gains from trade as they can trade the surplus of the good they specialize in for the good they do not specialize in, resulting in both of them being better off.

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