Question

1. Table: Production Possibilities for the United States and Canada One Possibility U.S. Production Possibilities Another Possibility Quantity of Cars (millions) Quantity of Lumber (millions of board feet) 10 0 10 Canada Production Possibilities One Possibility Another Possibility Quantity of Cars (millions) Quantity of Lumber (millions of board feet) 2 0 0 12 Reference: Ref 16-3 (Table: Production Possibilities for the United States and Canada) Examine the table Production Possibilities for the United States and Canada Both nations can produce cars and lumber. If these nations were to specialize and trade, which statement is a potential agreement that would benefit both nations? OThe United States would export 1 million cars to Canada in exchange for 2 million board feet of lumber. The United States would export 1 million cars to Canada in exchange for 0.5 million board feet of lumber. The United States would export 1 million cars to Canada in exchange for 8 million board feet of lumber. The United States would export 1 million cars to Canada in exchange for 1 million board feet of lumber.

Answer 1

( Note: All values given are in millions)

From all its available resources, US can produce either 10 units of cars or 10 units of lumber. Therefore, US has to give up the production of a unit of car to produce a unit of lumber. So, the opportunity cost of producing a unit of lumber is a unit of car in the US.

In Canada, either 2 units of cars or 12 units of lumber can be produced. So, in order to produce a unit of lumber, Canada has to give up 2/12 = 1/6 units of car. Therefore, the opportunity cost of producing lumber in Canada is only 1/6 car.

Since the opportunity cost of producing lumber is much less in Canada compared to the US, Canada has a comparative advantage in producing lumber. Similarly, US has a comparative advantage in producing cars (even though it has an absolute disadvantage in producing both car and lumber).

So, if trade hapoens between the US and Canada, US will export car to Canada and Canada will export lumber to the US. The price of lumber will be between 1/6 car per unit of lumber and 1 car per unit of lumber.

Therefore, the United States would export 1 million cars to Canada in exchange for 2 million board feet of lumber ( Price of lumber in terms of car is 0.5 which lies within the required price range) . Therefore, the first option is the correct option.