Suppose that the terms of trade between Mexico and the US are 3.5 tons of avocados...
Suppose that the terms of trade between Mexico and the US are 3.5 tons of avocados in exchange for 1 ton of soybeans. Would the two countries be willing to trade at this relative price? Explain.
|
Production Alternatives (Tons) US Production Possibilities |
|||||
|
Product |
R |
S |
T |
U |
V |
|
Avocados |
0 |
30 |
33 |
60 |
90 |
|
Soybeans |
30 |
20 |
19 |
10 |
0 |
|
Production Alternatives (Tons) Mexico’s Production Possibilities |
|||||
|
Product |
A |
B |
C |
D |
E |
|
Avocados |
0 |
20 |
24 |
40 |
60 |
|
Soybeans |
15 |
10 |
9 |
5 |
0 |
Homework Answers
Opportunity cost of 1 ton of Soyabean in US = Total avocados given up/Total Soyabeans produced = 90/30 = 3 avocados
Opportunity cost of 1 ton of Soyabean in Mexico = Total avocados given up/Total Soyabeans produced = 60/15 = 4 avocados
They would be willing to trade as long as trading ratio lies between 3 and 4 avocados. So, the two countries be willing to trade at the relative price of 3.5 tons of avocados in exchange for 1 ton of soybeans.
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