Suppose That by Devoting All of Its Resources to the Production

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The Answer is In nation L, the cost of producing 1 Y is 2 X (20 Y = 40 X) given the stated cost conditions.In nation M, the cost of producing 1 Y is only 1 X.Thus, in terms of opportunity costs or the amount of X that must be given up to get each Y, nation M can produce units of Y more cheaply.Therefore, nation M should produce Y's and nation L should produce units of X, and M should trade away some of its Y to nation L for some of the units of X produced in nation L.The limits to the terms of trade are set by the cost ratio in each country.In other words, it is to nation L's advantage to trade away units of X for as many units of Y as it can get above the lower limit of 0.5 Y which is what each X costs in nation L.However, nation M will not be willing to trade more than one Y for each X since any more than that could be gotten more cheaply by producing them at home.Therefore the limits to the terms of trade will be between 0.5 Y and 1 Y for each X.And country M will be able to get between 1 X and 2 X for each Y.

Suppose That by Devoting All of Its Resources to the Production

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