Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film.Suppose that opportunity costs are constant.Which of the following is FALSE?

Question

Quizplus · Accepted Answer

To determine the terms of trade that would make trade mutually advantageous, we need to compare opportunity costs. Canada's opportunity cost of producing one unit of timber is 1/5 unit of film (15 timber/3 film), while Mexico's opportunity cost of producing one unit of timber is 1/3 unit of film (9 timber/3 film). Therefore, Mexico has a comparative advantage in film production, and Canada has a comparative advantage in timber production. To find the terms of trade that would make trade mutually beneficial, we need to find the relative price ratio of timber to film that lies between the opportunity costs of the two countries. This ratio should be between 1/5 and 1/3. One unit of film for six units of timber falls within this range, so D is the correct answer.

Suppose That Canada Can Produce 15 Timber or 3 Film