Question

0/1 pts Question 1 Incorrect Suppose that two economies, Eugene and Portland, may engage in trade. Each economy produces two goods, Beer and Coffee. All resources are identical (so each economy will have a straight-line PPF). Eugene may use its resources to produce up to 12 Beer or 8 Coffee. Portland may use its resources to produce up to 400 Beer or 300 Coffee. Which good should each economy specialize in? There is no reason for either economy to specialize Portland should specialize in Coffee and Eugene should specialize in Beer. Portland should specialize in Beer and Eugene should specialize in Coffee. Each economy should specialize in a good that they have comparative advantage in. 0/1 pts Incorrect Question 2 Refer back to the economies in the previous question. Which of the following trade deals would both economies find acceptable? Select ALL that apply. Eugene trades 5 of its Coffee for 7 of Portland's Beer. Eugene can produce 7.5 Beer on its own by giving up 5 Coffee. 5 of Portland's Coffee. Eugene trades 7 of its Beer for * Portland trades 5 of its Beer for 3 of Eugene's Coffee. Portland can produce 3.75 Coffee on its own by giving up 5 Beer. Portland trades 3 of its Coffee for 2 of Eugene's Beer.

Answer 1

1. Eugene's opportunity cost of producing 1 beer is (8/12) = 0.67 coffee and opportunity cost of producing 1 coffee is (12/8) = 1.5 beers.

Portland's opportunity cost of producing 1 beer is (300/400) =0.75 coffee and opportunity cost of producing 1 coffee is (400/300) = 1.3 beers.

As Eugene's opportunity cost of producing 1 beer is less than that of Portland's, therefore Eugene has comparative advantage in the production of beer. Portland's opportunity cost of producing 1 coffee is less than that of Eugene's, so Portland has comparative advantage in the production of coffee.

Each country will specialize in the production in which they have comparative advantage. So, Eugene will specialize in the production of beer and Portland will specialize in the production of coffee.

Answer: option B

2. To gain from trade the price of trade should lie between both country's opportunity cost of producing the good. Therefore, to gain from trade, price of 1 beer should lie between 0.67 coffee and 0.75 coffee. Or, price of 1 coffee should lie between 1.3 beers and 1.5 beers.

As Eugene specializes in the production of beer and Portland specializes in the production of coffee, therefore Eugene will trade beer for Portland's coffee.

If Eugene trades 7 of it's beer for 5 of Portland's coffee, therefore price of beer will be (5/7) = 0.71 coffee for 1 beer. This price lies between both country's opportunity cost of producing beer. So, this trade is acceptable.

If Portland trades 3 of it's coffee for 2 of Eugene's beer, then price of trade is (2/3) = 0.67 beer for 1 coffee. Therefore,This trade is not acceptable.

Answer: option B