(Figure: Home Equilibrium with No Trade) Suppose that trade occurs and Home finds its comparative advantage in the production of wheat. How many bushels of wheat will it produce?
A) 0 bushels
B) 50 bushels
C) 100 bushels
D) between 50 and 100 bushels

Question

(Figure: Home Equilibrium with No Trade) Suppose that trade occurs and Home finds its comparative advantage in the production of wheat. How many bushels of wheat will it produce? 
A) 0 bushels 
B) 50 bushels 
C) 100 bushels 
D) between 50 and 100 bushels

Quizplus · Accepted Answer

According to the principle of comparative advantage, Home will specialize in producing the good in which it has a comparative advantage (in this case, wheat). Therefore, it will shift production from cloth to wheat and produce at a point along the new production possibility frontier (PPF) where it has a higher opportunity cost for producing wheat compared to cloth. This point lies on the PPF at which the slope is -2 (since the ratio of cloth consumption to wheat consumption in the trading equilibrium is 2). This point gives us a production combination of 100 bushels of wheat and 200 yards of cloth. Therefore, the answer is C) 100 bushels.

(Figure: Home Equilibrium with No Trade) Suppose That Trade Occurs