Two areas, Europe and America, can produce only goods A and B, under constant costs as indicated below.What will be the result of free trade between the two areas (assuming no transportation costs)?
A)Europe will export A and B to America.
B)Europe will import A and export B.
C)Europe will import B and export A.
D)Europe will import A and B from America.
E)No trade will take place.

Question

Two areas, Europe and America, can produce only goods A and B, under constant costs as indicated below.What will be the result of free trade between the two areas (assuming no transportation costs)? 
A)Europe will export A and B to America. 
B)Europe will import A and export B. 
C)Europe will import B and export A. 
D)Europe will import A and B from America. 
E)No trade will take place.

Quizplus · Accepted Answer

Looking at the table, we can see that Europe has a lower cost advantage in producing good A while America has a lower cost advantage in producing good B. Therefore, it would make sense for Europe to export good A to America while importing good B from America. This would result in Europe importing good B and exporting good A, making choice C the correct answer.

Two Areas, Europe and America, Can Produce Only Goods a and B