Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Foreign produces 1 ton of corn and 0.5 ton of wheat. Without trade (in autarky), Home's daily production is 20 tons of wheat and 10 tons of corn. At which international price will Home's gains from trade be largest?
A) 1/2 ton of wheat per ton of corn
B) 1 ton of wheat per ton of corn
C) 1.5 tons of wheat per ton of corn
D) 2 tons of wheat per ton of corn

Question

Quizplus · Accepted Answer

Home's gains from trade will be largest when the international price is 1/2 ton of wheat per ton of corn. This is because at this price, Home can produce corn at a lower cost than Foreign and wheat at a higher cost than Foreign. As a result, Home will specialize in producing corn and export it to Foreign in exchange for wheat.

Assume That Two Countries (Home and Foreign) Each Produce Two