Table 3-34
Assume that Indonesia and India can switch between producing rice and bananas at a constant rate.

-Refer to Table 3-34. At which of the following prices, if any, can India and Indonesia both gain from trade?
A)1/5 units of bananas per unit of rice.
B)1/3 units of bananas per unit of rice.
C)3/5 units of bananas per unit of rice.
D)None of the above.

Question

Table 3-34
Assume that Indonesia and India can switch between producing rice and bananas at a constant rate.
​ 
-Refer to Table 3-34. At which of the following prices, if any, can India and Indonesia both gain from trade?
A)1/5 units of bananas per unit of rice. 
B)1/3 units of bananas per unit of rice. 
C)3/5 units of bananas per unit of rice. 
D)None of the above.

Quizplus · Accepted Answer

To determine if India and Indonesia can both gain from trade, we need to compare their opportunity costs of producing rice and bananas.

For India, the opportunity cost of producing 1 unit of bananas is 1/8 unit of rice (200/25 = 8) and the opportunity cost of producing 1 unit of rice is 8 units of bananas.

For Indonesia, the opportunity cost of producing 1 unit of bananas is 1/6 unit of rice (120/20 = 6) and the opportunity cost of producing 1 unit of rice is 6 units of bananas.

To find the range of possible mutually beneficial trades, we need to find a price at which both countries have a comparative advantage in producing one good over the other.

At a price of 1/5 units of bananas per unit of rice or lower, both countries have a comparative advantage in producing rice, so there is no mutually beneficial trade.

At a price of 1/3 units of bananas per unit of rice or higher, both countries have a comparative advantage in producing bananas, so there is no mutually beneficial trade.

At a price of 3/5 units of bananas per unit of rice, India has a comparative advantage in producing rice (which has an opportunity cost of 1/8 units of bananas) and Indonesia has a comparative advantage in producing bananas (which has an opportunity cost of 1/6 units of rice). At this price, both countries can benefit by specializing in producing the goods at which they have a comparative advantage and trading with each other. Therefore, choice C is the best answer.

Table 3-34 Assume That Indonesia and India Can Switch Between Producing Rice