Use the following to answer question(s): Production Possibilities for Machinery and Petroleum

-(Exhibit: Production Possibilities for Machinery and Petroleum) Assuming constant costs in the neighborhood of their current levels of production, the exhibit shows the number of units of machinery each country would have to forgo in order to produce the additional petroleum indicated.A terms-of-trade equation that could emerge as a result of trade between the two countries is:

Question

Use the following to answer question(s): Production Possibilities for Machinery and Petroleum
 
-(Exhibit: Production Possibilities for Machinery and Petroleum) Assuming constant costs in the neighborhood of their current levels of production, the exhibit shows the number of units of machinery each country would have to forgo in order to produce the additional petroleum indicated.A terms-of-trade equation that could emerge as a result of trade between the two countries is:

Quizplus · Accepted Answer

The terms of trade should reflect the opportunity cost of producing one good in terms of the other. If the opportunity cost of producing machinery is equal to the opportunity cost of producing petroleum, then 1M = 1P is a plausible terms-of-trade equation.

Use the Following to Answer Question(s): Production Possibilities for Machinery