Suppose Edland can produce either 30 units of good A or 30 units of good Z,and Georgeland can produce either 150 units of good A or 200 units of good Z.For them both to benefit from trade,how much will each unit of Z exchange for?

Question

Quizplus · Accepted Answer

To determine the exchange ratio, we need to compare the opportunity cost of producing one unit of A or Z in each country. 
For Edland, the opportunity cost of producing one unit of A is 1Z/30A, and the opportunity cost of producing one unit of Z is 30A/1Z. 
For Georgeland, the opportunity cost of producing one unit of A is 4/3 Z/A, and the opportunity cost of producing one unit of Z is 3/4 A/Z. 
Comparing the opportunity costs, we can see that Edland has a comparative advantage in producing A while Georgeland has a comparative advantage in producing Z. 
Suppose they agree to trade at an exchange ratio of x A/Z. Then for Edland, producing Z and trading it away should yield at least as much as producing A directly. 
So, 1Z/30A <= x A/Z => x >= 30/1 = 30. 
For Georgeland, producing A and trading it away should yield at least as much as producing Z directly. 
So, 4/3 Z/A >= 1/x A/Z => x >= 4/3. 
Thus, the exchange ratio should be between 30 and 4/3, which is  between 0.75 and 1 unit of A per unit of Z. Therefore, (B) is the correct answer.

Suppose Edland Can Produce Either 30 Units of Good a or 30