Table 3-20
Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate.
-Refer to Table 3-20. At which of the following prices would both Brad and Theresa gain from trade with each other?
A)12 bushels of wheat for 6 pounds of beef
B)12 bushels of wheat for 8 pounds of beef
C)12 bushels of wheat for 12 pounds of beef
D)Brad and Theresa could not both gain from trade with each other at any price.

Question

Table 3-20
Assume that Brad and Theresa can switch between producing wheat and producing beef at a constant rate. 
-Refer to Table 3-20. At which of the following prices would both Brad and Theresa gain from trade with each other?
A)12 bushels of wheat for 6 pounds of beef 
B)12 bushels of wheat for 8 pounds of beef 
C)12 bushels of wheat for 12 pounds of beef 
D)Brad and Theresa could not both gain from trade with each other at any price.

Quizplus · Accepted Answer

At a price of 12 bushels of wheat for 8 pounds of beef, Brad has a comparative advantage in producing wheat (1/2 bushel of wheat per pound of beef) and Theresa has a comparative advantage in producing beef (2/3 bushel of wheat per pound of beef). Therefore, Brad can produce 24 bushels of wheat and trade with Theresa for 12 pounds of beef, leaving him with 12 bushels of wheat and 12 pounds of beef. Likewise, Theresa can produce 18 pounds of beef and trade with Brad for 12 bushels of wheat, leaving her with 6 pounds of beef and 12 bushels of wheat. Both Brad and Theresa benefit from this trade. At any other price, either Brad or Theresa would have a comparative advantage in producing both goods, and there would be no gains from trade.

Table 3-20 Assume That Brad and Theresa Can Switch Between Producing Wheat