Question

Canada                                                                                  Mexico
Good X	Good Y	Good X	Good Y
0	32	0	24
4	24	4	18
8	16	8	12
12	8	12	6
16	0	16	0

Use the following data to answer the following questions: Untied States can produce either 18 oranges or 9 apples in an hour, whereas, Mexico can produce either 16 oranges or 4 apples in an hour.

        2. What are the opportunity costs of producing 1 apple for United States and Mexico respectively?  

         3.  What are the terms of trade between apples and oranges that would allow both Untied States and Mexico to gain by specialization and exchange?

Answer 1

2. Opportunity cost of producting 1 apple in US = 18/9 = 2 oranges

Opportunity cost of producting 1 apple in Mexico = 16/4 = 4 oranges

3. The terms of trade will need to be between 2 and 4 oranges per apple for both the countries to gain. Assume it is 3 oranges per apple.

US will specialize in apples, and will export some of these to Mexico, for which it will receive 3 times oranges. (it would have been able to produce only 2 times locally).

Mexico, on the other hand, will produce only oranges and export some of these to US, in return getting 1/3 apples (it would have only been able to produce 1/4 locally).