Using the figure above,suppose with no trade Liz and Joe each produce at point A on their respective PPFs.Then,Joe suggests that they specialize and trade.He would produces only salads and Liz would produce only smoothies.Then,Joe says,he would buy 16 smoothies from Liz at a price of 1.5 salads per smoothie.Liz should
A) accept Joe's offer since she will gain 4 smoothies and 4 salads.
B) accept Joe's offer as she will be as well off as with no trade.
C) not accept Joe's offer as the price he offers is too low for her to gain from trade.
D) not accept Joe's offer since she would lose 2 smoothies and 2 salads.
E) accept Joe's offer since she will gain 4 salads.

Question

Quizplus · Accepted Answer

Before trade, Liz produces 8 smoothies and 8 salads, while Joe produces 8 smoothies and 8 salads.

After specialization and trade, Liz only produces smoothies while Joe only produces salads. Liz can produce 16 smoothies, and Joe can produce 16 salads.

Joe's offer of 1.5 salads per smoothie is lower than Liz's opportunity cost of producing a smoothie, which is 2 salads per smoothie (the slope of her PPF at point A). Therefore, Liz is better off selling her 16 smoothies to Joe and receiving 24 salads in return (16 smoothies * 1.5 salads per smoothie = 24 salads) than producing the smoothies herself and giving up 32 salads (her opportunity cost of producing 16 smoothies).

Overall, Liz gains 4 smoothies (16 from Joe minus 12 she now produces) and 4 salads (24 received from Joe minus 20 she now produces) from trade. Therefore, she should accept Joe's offer.

Using the Figure Above,suppose with No Trade Liz and Joe