Table 9-6
Output per hour Production and Production
of work Consumption without Trade with Trade

Denmark and Belize can produce both clocks and hats. Each country has a total of 200 available labor hours for the production of clocks and hats. Table 9-6 shows the output per hour of work, the production and consumption quantities without trade, and the production numbers with trade.
-Refer to Table 9-6.All of the following are terms of trade that could possibly benefit both countries except
A)1 hat : 3/5 of a clock
B)1 hat : 1 clock
C)1 hat : 1.5 clocks
D)1 hat : 2.5 clocks

Question

Table 9-6
Output per hour Production and Production
of work Consumption without Trade with Trade
  
Denmark and Belize can produce both clocks and hats. Each country has a total of 200 available labor hours for the production of clocks and hats. Table 9-6 shows the output per hour of work, the production and consumption quantities without trade, and the production numbers with trade.
-Refer to Table 9-6.All of the following are terms of trade that could possibly benefit both countries except
A)1 hat : 3/5 of a clock 
B)1 hat : 1 clock 
C)1 hat : 1.5 clocks 
D)1 hat : 2.5 clocks

Quizplus · Accepted Answer

In order for a terms of trade to benefit both countries, the trade must allow both countries to consume more of both goods than they would be able to produce on their own. This occurs when the terms of trade are between the opportunity costs of both countries. The opportunity cost of Denmark for producing one hat is 2/3 of a clock (10/15), while the opportunity cost of Belize for producing one hat is 1 clock. Thus, if the terms of trade are greater than 2/3 of a clock per hat but less than 1 clock per hat, both countries can benefit. Option D, 1 hat: 2.5 clocks, falls within this range, while the other options do not.

Table 9-6 Output Per Hour Production and Production