Question
Country A and Country B produce two goods, X and Y. The production possibilities frontiers (PPFs) for the two countries are given by: Country A:
Country A and Country B produce two goods, X and Y. The production possibilities frontiers (PPFs) for the two countries are given by:
Country A: X = 100 - Y
Country B: X = 80 - Y/2
Assume that both countries have a constant opportunity cost of production. If the two countries were to trade, what would be the terms of trade that maximize the combined output of both countries? What is the gain from trade for both countries? Show your calculations.
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