Suppose that the annual production possibilities of Texas and Louisiana for rice and cotton are those shown in the figure below. Can specialization and trade benefit both states even though Texas can outproduce Louisiana in both cotton and rice? If so, in which crop would each state specialize, and what would be the limits of mutually beneficial terms of trade?

Tons Tons 800 , 000 Cotton Texas Cotton Louisiana 700,000 600,000 600,000 500,000 500, 000 400,000 400,000 300,000 300,000 200,000 200, 000 100,000 100,000 Rice Rice 0 0 100 200 300 400 500 600 700 100 200 300 400 500 600 700 (thousands of tons) ( thousands of tons) Fig. 1