Question

Saved Help Save&Exit Submit Gains from Trade Exercise 1 Both Geppetto and Lewis are toy store owners. They decide that they would like to trade puzzles and puppets in order to better stock their toy store shelves. The table below compares their production possibilities schedules. 5 points Production Possibilities Schedules Geppetto Lewis Puzzles Puzzles 50 40 30 20 10 Puppets Puppets eBook 100 80 60 40 20 References 12 16 20 10 15 20 25 Instructions: Enter your answers as a whole number. a. Geppetto and Lewis agree to trade at a rate of 3 puzzles for each puppet. With those terms of trade, who is most likely to be the supplier of puzzles? Who is most likely to be the supplier of puppets? Puzzles: (Click to select) Puppets:ick to select) b. The two toy store owners agree to specialize and to trade 30 puzzles for 10 puppets. The terms of trade are still 3 puzzles for each puppet. How many puzzles

Answer 1

The two parties would gain from trade if they have comparative advantage in the respective commodities, the comparative advantage is defined in terms of opportunity cost. The country with lower opportunity cost should specialize in the production of the commodity. So here the opportunity cost for puzzles is lower of Geppetto so he should be the producer of puzzles.

Opportunity cost for puzzles for Geppetto $=4/20$

$=0.2$

  

Opportunity cost for puzzles for Lewis $=5/10$

  $=0.5$

Opportunity cost for puppets for Geppetto $=20/4$

  $=5$

Opportunity cost for puppets for Lewis $=10/5$

  $=2$.

Ans:

1. Puzzles- Geppetto.

2. Puppets- Lewis.