Figure 3-16
Hosne's Production Possibilities Frontier
Merve's Production Possibilities Frontier
-Refer to Figure 3-16.At which of the following prices would both Hosne and Merve gain from trade with each other?
A)5 wallets for 1.25 purses
B)5 wallets for 2.5 purses
C)5 wallets for 3.75 purses
D)Hosne and Merve could not both gain from trade with each other at any price.

Question

Figure 3-16
Hosne's Production Possibilities Frontier
Merve's Production Possibilities Frontier  
-Refer to Figure 3-16.At which of the following prices would both Hosne and Merve gain from trade with each other?
A)5 wallets for 1.25 purses 
B)5 wallets for 2.5 purses 
C)5 wallets for 3.75 purses 
D)Hosne and Merve could not both gain from trade with each other at any price.

Quizplus · Accepted Answer

Both Hosne and Merve have different opportunity costs for producing wallets and purses. Hosne has a comparative advantage in producing wallets while Merve has a comparative advantage in producing purses. Therefore, at a price where both can benefit from trade, the exchange ratio should be between their opportunity costs. From the graph, Hosne's opportunity cost of producing one purse is 3 wallets, while Merve's opportunity cost of producing one purse is 1.5 wallets. Therefore, an exchange ratio of 5 wallets for 3.75 purses falls between their opportunity costs and both can gain from trade.

Figure 3-16 Hosne's Production Possibilities Frontier