Figure 3-20
Canada's Production Possibilities Frontier
Mexico's Production Possibilities Frontier
-Refer to Figure 3-20.At which of the following prices would both Canada and Mexico gain from trade with each other?
A)9 units of Good Y for 6 units of Good X
B)8 units of Good Y for 20 units of Good X
C)70 units of Good Y for 30 units of Good X
D)Canada and Mexico could not both gain from trade with each other at any price.

Question

Figure 3-20
Canada's Production Possibilities Frontier
Mexico's Production Possibilities Frontier  
-Refer to Figure 3-20.At which of the following prices would both Canada and Mexico gain from trade with each other?
A)9 units of Good Y for 6 units of Good X 
B)8 units of Good Y for 20 units of Good X 
C)70 units of Good Y for 30 units of Good X 
D)Canada and Mexico could not both gain from trade with each other at any price.

Quizplus · Accepted Answer

For both countries to gain from trade, the trade price must be between their opportunity costs. If Canada can produce Good X at a lower opportunity cost than Mexico, and Mexico can produce Good Y at a lower opportunity cost than Canada, then a trade price of 9 units of Good Y for 6 units of Good X allows both to benefit.

Figure 3-20 Canada's Production Possibilities Frontier