With one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input).The range of mutually beneficial trade between nation A and B is:
A) 3Y

Question

With one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input).The range of mutually beneficial trade between nation A and B is:
A) 3Y < 3X < 5Y
B) 5Y < 3X < 9Y
C) 3Y < 3X < 9Y
D) 1Y < 3X < 3Y

Quizplus · Accepted Answer

Nation A has a comparative advantage in producing both X and Y, as it can produce 3 units of either good with 1 hour of labor. Nation B has a comparative advantage in producing Y, as it can produce 3 units of Y with 1 hour of labor while only producing 1 unit of X with the same amount of labor.

To determine the range of mutually beneficial trade, we compare the opportunity cost of producing each good in each nation. For Nation A, the opportunity cost of producing 1 unit of X is 1/3 unit of Y (3Y/3X), while the opportunity cost of producing 1 unit of Y is 1/3 unit of X (3X/3Y). For Nation B, the opportunity cost of producing 1 unit of X is 3 units of Y (3Y/1X), while the opportunity cost of producing 1 unit of Y is 1/3 unit of X (1X/3Y).

Nation A has a lower opportunity cost of producing X, so it should specialize in producing X and trade with Nation B for Y. Conversely, Nation B has a lower opportunity cost of producing Y, so it should specialize in producing Y and trade with Nation A for X. The range of mutually beneficial trade is between the opportunity costs of producing each good in each nation - 3Y for Nation A and 1/3 X for Nation B - which gives us the answer of 3Y < 3X < 9Y.

With One Hour of Labor Time Nation a Can Produce