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Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and no steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and no wheat. If country B spends all of its available resources producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel.
-(Scenario: Countries A and B) Look at the scenario Countries A and B. If countries A and B both specialize and trade:
A)only country A will gain.
B)only country B will gain.
C)country A and country B will gain if they both specialize in the good in which they have a comparative advantage.
D)neither country will gain.

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Quizplus · Accepted Answer

If countries A and B both specialize in the good in which they have a comparative advantage, they can increase their combined output and benefit from trade. Country A has a comparative advantage in producing wheat (since it can produce 500 tons compared to B's 400 tons) and country B has a comparative advantage in producing steel (since it can produce 400 tons compared to A's 250 tons). By specializing and trading, country A can produce more wheat than before by reallocating some resources to steel production and then trading the excess wheat for steel from country B. Country B can do the same by producing more steel than before and trading it for wheat from country A. Both countries can benefit from this arrangement, and overall output in both goods will increase.

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