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Posted 10 months ago
Which of the following situations would allow agents to gain from specialization and trade with one another?
Choose 1 answer:
(A) The terms of trade are between the two agents' opportunity costs.
(B) The agents have the same opportunity costs.
(c) One agent has absolute advantage in both goods.
(D) One agent has comparative advantage in both goods.
(E) Either agent has absolute advantage in either of the goods.
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
To understand how agents can gain from specialization and trade, we need to consider the concepts of opportunity cost, absolute advantage, and comparative advantage
step 2
Absolute advantage refers to the ability of an agent to produce more of a good or service than another agent with the same amount of resources
step 3
Comparative advantage refers to the ability of an agent to produce a good or service at a lower opportunity cost than another agent
step 4
Specialization occurs when agents focus on the production of goods or services for which they have a comparative advantage
step 5
The terms of trade are the rate at which goods are exchanged between agents. For trade to be beneficial, the terms of trade must be between the two agents' opportunity costs
step 6
If the agents have the same opportunity costs, there is no incentive to trade as they both give up the same amount of one good to produce another
step 7
If one agent has an absolute advantage in both goods, there is still room for trade if the other agent has a comparative advantage in one of the goods
step 8
If one agent has a comparative advantage in both goods, they would specialize in the good where their comparative advantage is greatest, and trade could still occur if the terms of trade are favorable
step 9
The correct answer is the situation where the terms of trade are between the two agents' opportunity costs, which allows both agents to benefit from trade
Answer
A
Key Concept
Comparative Advantage and Terms of Trade
Explanation
Agents gain from specialization and trade when they specialize in goods for which they have a comparative advantage and when the terms of trade are set between their respective opportunity costs. This allows each agent to benefit from the trade by obtaining goods at a lower opportunity cost than if they produced it themselves.
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