Question

Figure 1 Costa Rica's Production Possibilities Frontier 20 Ias Honduras's Production Possibilities Frontier Toybeans in pounds) Thousu) 18+ 16+ opp or s opp of C 1.33 € 75 12 Oppots 2 oppore 132 12+ 05 4 6 8 2 4 6 8 10 12 14 16 18 10 12 14 16 18 20 cffe fin pound 30 offe fin pound 11. Refer to Figure 1. At which of the following prices would both Costa Rica and Honduras gain from trade with each other? (a.) 6 lbs. of coffee for 1 lb. of soybeans b. 1 lb. of coffee for 1 lb. of soybeans 1.5 lbs. of coffee for 1 lb. of soybeans d. 2.5 lbs. of coffee for 1 lb. of soybeans Costa Rica and Honduras could not both gain from trade with each other at any price.

Answer 1

Both countries would gain from trade when trade price lies between the opportunity costs of the countries.

Opportunity cost of producing 1 lb of soybeans (Costa Rica) = 16/12 = 1.33 lbs coffee ( = 1/slope)

Opportunity cost of producing 1 lb of soybeans (Honduras) = 12/6 = 2 lbs coffee

option c is correct (1.5 lbs of coffee for 1 lb of soybeans lies between the opportunity costs of both the countries)