Nations Quirk and Turk can produce aluminum and oil in the following maximum quantities when all of their resources are fully employed.
Which one of the following terms of trade is most likely to produce exchange between the two nations?

Question

Nations Quirk and Turk can produce aluminum and oil in the following maximum quantities when all of their resources are fully employed. 
Which one of the following terms of trade is most likely to produce exchange between the two nations?

Quizplus · Accepted Answer

The terms of trade that would be acceptable to both nations would be one where the opportunity cost of each good is different in each country. In this case, Nation Quirk's opportunity cost of producing one unit of aluminum is 2.5 units of oil (200/80), while Nation Turk's opportunity cost of producing one unit of aluminum is 1.25 units of oil (100/80). Therefore, if Nation Quirk trades one unit of oil for anything less than .4 units of aluminum, it is better off producing the aluminum itself (since it can use the same resources to produce 2.5 units of oil, which is more than one unit of oil). Similarly, if Nation Turk trades one unit of oil for more than 1.25 units of aluminum, it is better off producing the aluminum itself (since it can use the same resources to produce 1.25 units of oil, which is more than one unit of oil). The only option that falls between these two opportunity costs is C, where Nation Quirk trades one unit of oil for .4 units of aluminum. This would be acceptable to both nations as they both gain from trade.

Nations Quirk and Turk Can Produce Aluminum and Oil in the Following