Table 14-3
Karl can produce either 10 tonnes of oranges or 5 tonnes of apples in a year, while Adam can produce either 5 tonnes of oranges or 10 tonnes of apples.
-Refer to Table 14-3.What terms of trade between Karl and Adam would be mutually beneficial?

Question

Quizplus · Accepted Answer

Both Karl and Adam have a comparative advantage in one of the two goods they can produce, therefore they could potentially benefit from trade. In order for trade to be mutually beneficial, the terms of trade should lie between the opportunity cost of production for each of them. For Karl, the opportunity cost of producing one tonne of oranges is to give up the production of 0.5 tonnes of apples, while for Adam, it is to give up the production of 2 tonnes of oranges. Therefore, the terms of trade should be between 0.5 and 2 oranges per apple. Among the given options, the only one that meets this requirement is B, with terms of trade of 1 apple per 1.5 oranges, which is between 0.5 and 2.

Table 14-3 Karl Can Produce Either 10 Tonnes of Oranges or 5