Use the production possibilities data below for Lebos and Slavia to answer the following question(s). Table 2-1
Refer to Table 2-1. Which of the following would be a mutually agreeable rate of exchange?
A) 1F = 1C
B) 1F = 2C
C) 1F = 3C
D) No exchange rate would be mutually agreeable.

Question

Use the production possibilities data below for Lebos and Slavia to answer the following question(s). Table 2-1
  Refer to Table 2-1. Which of the following would be a mutually agreeable rate of exchange?
A) 1F = 1C 
B) 1F = 2C 
C) 1F = 3C 
D) No exchange rate would be mutually agreeable.

Quizplus · Accepted Answer

The mutually agreeable rate of exchange would be one where both countries benefit from trade. Looking at the table, we can see that Lebos can produce more fish and Slavia can produce more wheat. If they specialize in producing the good that they can produce more efficiently (also known as comparative advantage) and trade with each other, both countries can consume more of both goods than if they tried to produce both goods themselves. In order for the trade to be beneficial, the exchange rate should reflect the relative prices of the two goods in each country. In other words, the exchange rate should be such that Slavia can buy one fish for less than it costs to produce one fish, and Lebos can buy one unit of wheat for less than it costs to produce one unit of wheat. Looking at the table, we can see that the opportunity cost of producing one fish in Slavia is 2 units of wheat, while the opportunity cost of producing one fish in Lebos is 3 units of wheat. Therefore, a mutually agreeable rate of exchange would be where 1 fish in Lebos is worth 2 units of wheat in Slavia or 1F = 2C.

Use the Production Possibilities Data Below for Lebos and Slavia