The following production possibilities schedule shows the quantities of soybeans

Question

The following production possibilities schedule shows the quantities of soybeans and oil that can be produced in Canada and Mexico with one unit of equivalent resources. Soybeans Oil (bushels)(barrels) Canada Mexico 60 28 Which of the following terms of trade is mutually beneficial for Mexico and Canada? () A. 0 B. ° C. O D. 1 barrel of oil exchanges for 5 bushels of soybean 1 barrel of oil exchanges for 3 bushels of soybean 1 barrel of oil trades for 4 bushels of soybean 1 barrel of oil trades for 13 bushels of soybean

Explanation / Answer

Mutually beneficial trade for Canada and Mexico:

Canada:

Opportunity cost of producing 1 bushel soybean = 9/60 = 3/20 barrel oil.

Opportunity cost of producing 1 barrel oil = 20/3 bushels soybean.

Mexico:

Opportunity cost of producing 1 bushel soybean = 8/28 2/7 barrel oil.

Opportunity cost of producing 1 barrel oil = 7/2 bushel soybean.

Canada will specialize in soybean, and Mexico will specialize in oil.

The range of trading oil beneficial for Canada and Mexico is between 7/2 and 20/3 soybean. (3.5 – 6.66)

A. 1 barrel of oil exchanges for 5 bushels of soybean.

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