Use the production possibilities data below for Lebos and Slavia to answer the following question(s).
Table 2-1

-Refer to Table 2-1.Which of the following would be a mutually agreeable rate of exchange?

Question

Use the production possibilities data below for Lebos and Slavia to answer the following question(s).
Table 2-1

-Refer to Table 2-1.Which of the following would be a mutually agreeable rate of exchange?

Quizplus · Accepted Answer

Lebos has a comparative advantage in producing food (F) as it can produce 6 units of food or 0 units of clothing (C). Whereas Slavia has a comparative advantage in producing clothing (C) as it can produce 8 units of clothing or 0 units of food (F). 
To find a mutually agreeable rate of exchange, we need to find a rate where both countries can benefit. 
If we assume that Lebos produces all food and no clothing and Slavia produces all the clothing and no food, then Lebos will have 6F to trade and Slavia will have 8C to trade. 
If we set the exchange rate at 1F = 2C, Lebos can get 12C for its 6F which is more than what it could produce if it diverted resources towards clothing production (0C) and Slavia can get 3F for its 6C which is also more than what it could produce if it diverted resources towards food production (0F). Hence, both countries can benefit from an exchange rate of 1F = 2C.

Use the Production Possibilities Data Below for Lebos and Slavia