Suppose that a worker in Country A can make either 25 bananas or 5 tomatoes each year.Country A has 200 workers.Suppose a worker in Country B can make either 18 bananas or 6 tomatoes each year.Country B has 400 workers.Suppose Country B decides to specialize in tomatoes,and Country A specializes in bananas.What terms of trade would both countries agree to?
A)One tomato for one banana
B)One tomato for two bananas
C)One tomato for four bananas
D)One tomato for six bananas

Question

Quizplus · Accepted Answer

Under specialization, Country A can produce a maximum of 5000 bananas (25 bananas per worker x 200 workers) and Country B can produce a maximum of 2400 tomatoes (6 tomatoes per worker x 400 workers).

Let's assume that Country A produces 4000 bananas and Country B produces 1600 tomatoes.

In this case, the opportunity cost of producing a tomato in Country B is 3 bananas (18 bananas ÷ 6 tomatoes) while the opportunity cost of producing a tomato in Country A is 0.2 bananas (25 bananas ÷ 5 tomatoes).

Therefore, Country B has a comparative advantage in producing tomatoes while Country A has a comparative advantage in producing bananas.

If the terms of trade are set at one tomato for four bananas, then Country A can trade 1000 bananas for 250 tomatoes, while Country B can trade 800 tomatoes for 3200 bananas.

Both countries gain from this trade, as they can consume a combination of bananas and tomatoes that is impossible to produce domestically.

Therefore, the best choice is C) One tomato for four bananas.

Suppose That a Worker in Country a Can Make Either