The accompanying figures depict the production possibilities frontiers (PPFs) for two people who can allocate the same amount of time between making pizzas and making stromboli. If Jim and Pam were to specialize and trade, at what exchange rate would they find some quantity of trade to be mutually beneficial?
A) 3 pizzas for 1 stromboli
B) 1 pizza for 1 stromboli
C) 10 pizzas for 2 stromboli
D) 1 pizza for 1/2 stromboli
E) 1 pizza for 1/4 stromboli

Question

Quizplus · Accepted Answer

For trade to be mutually beneficial, the exchange rate must lie between the opportunity costs of the two individuals. If Jim's opportunity cost of making one pizza is 1 stromboli and Pam's opportunity cost is also 1 stromboli, then an exchange rate of 1 pizza for 1 stromboli would be mutually beneficial.

The Accompanying Figures Depict the Production Possibilities Frontiers (PPFs) for Two