Question

In a month, Carlos can produce a maximum of either 30 bushels of pears or 15 bushels of apples, or any linear combination in between. Similarly, Donna can produce a maximum of either 20 bushels of pears or 5 bushels of apples, or any linear combination in between.
a. What is the opportunity cost for Carlos to produce one more bushel of apples in terms of pears?
b. What is the opportunity cost for Donna to produce one more bushel of apples in terms of pears?
c. What would Donna and Carlos agree to as acceptable terms of trade?

Answer 1

Answer:

a. What is the opportunity cost for Carlos to produce one more bushel of apples in terms of pears?

opportunity cost to produce 1 more bushel of apples = 30 / 15 = 2 bushels of pears

b. What is the opportunity cost for Donna to produce one more bushel of apples in terms of pears?

opportunity cost to produce 1 more bushel of apples = 20 / 5 = 4 bushels of pears

c. What would Donna and Carlos agree to as acceptable terms of trade?

Donna has a comparative advantage in the production of pears, so she should produce pears and exchange them for apples produced by Carlos.

Any range between 1-2 pears (higher than 1, but lower than 2) exchanged for every apple would result in mutually beneficial trade.