If the opportunity cost of producing a ton of coffee in the U.S. is sixteen tons of rice, while the opportunity cost of producing a ton of coffee in Costa Rica is four tons of rice, the U.S. and Costa Rica could both benefit from specialization and trade if the terms of trade (measured in tons of rice delivered per ton of coffee received)were any number between

Question

Quizplus · Accepted Answer

The principle of comparative advantage suggests that a country should specialize in producing the good in which it has a lower opportunity cost, and trade for the good in which it has a higher opportunity cost. In this case, Costa Rica has a lower opportunity cost of producing coffee (four tons of rice) compared to the U.S. (sixteen tons of rice). Therefore, the U.S. should focus on producing rice and trade with Costa Rica for coffee. For trade to be mutually beneficial, the terms of trade should fall between the opportunity cost of production for the two countries. The U.S. would be willing to trade if it is offered less than sixteen tons of rice per ton of coffee received since that is its opportunity cost of producing coffee. Similarly, Costa Rica would be willing to trade if it is offered more than four tons of rice per ton of coffee received, which is its opportunity cost of producing rice. Therefore, the terms of trade should fall between four and sixteen tons of rice delivered per ton of coffee received. Hence, the best choice is C.

If the Opportunity Cost of Producing a Ton of Coffee