Suppose that the terms of trade between Coloradia and Equatoria were established

Question

Suppose that the terms of trade between Coloradia and Equatoria were established such that the price of one unit of timber is half that of one unit of fish -or equivalently, that the price of one unit of fish is twice that for one unit of timber. In that case, based upon the graphs below.... Cotton is fish

Coloradia might export 10 units of timber and import 5 units of fish

Equatoria might export 10 units of timber and import 5 units of fish

Coloradia might export 5 units of timber and import 10 units of fish

Equatoria might export 5 units of timber and import 10 units of fish

Coloradia might export 10 units of timber and import 5 units of fish

Equatoria might export 10 units of timber and import 5 units of fish

Coloradia might export 5 units of timber and import 10 units of fish

Equatoria might export 5 units of timber and import 10 units of fish

Coloradia Equatoria (units) Cotton Cotton (units) 20 15 10 15 10 0 5 10 15 20 25 Timber 0 5 10 15 20 25 Timber

Explanation / Answer

As Trade is established,

The price of one unit of timber = the price of ½ unit of Fish

=> Quantity of 2 unit of timber = Quantity of 1 unit of Fish.

Also specified as 1 unit of Cotton = 1 unit of Fish

As per Graph, at point A, Equatoria produce 10 unit of Timber or 15 unit of cotton.

=> 10 unit of timber = 15 unit of cotton = 15 unit of fish

=> 1 unit of timber = 1.5 unit of cotton = 1.5 unit of fish

Or 1 unit of fish = 10 / 15 unit of Timber

And at point A, Coloradia, produce 15 unit of timber or 2 unit of cotton.

=> 15 unit of timber = 2 unit of cotton = 2 unit of fish

=> 1 unit of timber = 2/15 unit of cotton = 2/15 unit of fish

Or 1 unit of fish = 15 / 2 unit of Timber

So the opportunity cost of fish is more in Coloradia than Equatoria.

Thus Coloradia might export 10 units of timber and import 5 units of fish

So the answer will be option (a)

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.