Assume Adia and Zardia can switch between producing wheat an

Assume Adia and Zardia can switch between producing wheat and producing beef at a constant rate:

In one hour, Andia can produce 3 Bushels of wheat and 5 pounds of beef.

In one hour Zardia can produce 4 bushels of wheat and 6 pounds of beef.

At which of the following prices would both Andia and Zardia gain from trade with each other? A - 6 bushels of wheat for 10.5 pounds of beef. B - 12 bushels of wheat for 19 pounds of beef. C - 24 bushels of wheat for 34 pounds of beef. (I know the answer is B but do not understand why. Please explain the steps to reach this conclusion).

Solution

Let\'s compute the opportunity costs (OC).

In Andia, OC of wheat = 5/3 = 1.67 beef

OC of beef = 3/5 = 0.6 wheat

In Zardia, OC of wheat = 6/4 = 1.5

OC of beef = 4/6 = 0.67 wheat

Andia can make beef at a lower OC than Zardia can (0.6 < 0.67), so Andia has comparative advantage in beef. Zardia can make wheat at a lower OC than Andia can (1.5 < 1.67), so Zardia has comparative advantage in wheat.

Andia will produce & export beef, Zardia will produce & export wheat.

Trade is beneficial if, relative price (OC) of wheat lies between 1.5 and 1.67.

For option (B), OC of wheat = 19/12 = 1.58 beef, which lies within the permissible range of 1.50 to 1.67. So, (B) is correct.