For case II, in what range must the "international" price of wheat fall? i.e. if North and South Dakota trade only with each other, what is the range of prices possible?
A)Between 1 bushel of wheat = 4/3 bottles of beer and 1 bushel of wheat = 2 bottles of beer
B)Between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = 2 bottles of beer
C)Between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = ½ bottles of beer
D)None of the above

Question

Quizplus · Accepted Answer

When North and South Dakota trade only with each other, the relative price of wheat in terms of beer is determined by their production possibility curves, which intersect at a rate of exchange of 1 bushel of wheat for 4/3 bottles of beer. If the international price of wheat is higher than this rate, North Dakota will export wheat to other regions, while if it is lower, it will import wheat from other regions. This implies that the range of possible prices of wheat in the isolated North-South Dakota market is between 1 bushel of wheat = 4/3 bottles of beer (the opportunity cost of producing wheat in South Dakota) and 1 bushel of wheat = 2 bottles of beer (the opportunity cost of producing wheat in North Dakota). Therefore, option A is the correct answer.

For Case II, in What Range Must the "International" Price