Assume That Two Countries (Home and Foreign) Each Produce Two

question 137

Multiple Choice

Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Foreign produces 1 ton of corn and 0.5 ton of wheat. Without trade (in autarky) , Home's daily production is 20 tons of wheat and 10 tons of corn. At which international price will Home's gains from trade be largest?

• A) 1/2 ton of wheat per ton of corn
• B) 1 ton of wheat per ton of corn
• C) 1.5 tons of wheat per ton of corn
• D) 2 tons of wheat per ton of corn

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Definitions:

Production Possibilities Curve

A graph that depicts the maximum output of two goods that can be produced with available resources and technology, assuming all resources are fully utilized.

Tax Policy

The government's approach to taxation, which includes the determination of tax rates and the identification of what economic activities or transactions will be taxed.

Production Possibilities Curve

A graphical representation showing the maximum combination of goods and services that can be produced using all available resources efficiently.

Fixed Quantity

A specific, unchanging amount of a good or service, not influenced by price changes.