Question

Use the production possibilities table below to answer the following question. Assume constant opportunity costs for Steven and Matthew.

Unlts of Cheese In a Day Fish in a Day
Steven 10 25
Matthew 30 10

Which of the following would be mutually beneficial terms of trade for both Stephen and Matthew?
a. Steven offers Matthew 1 fish for 2 units of cheese
b. Steven offers Matthew 1 unit of chose for 2 fish.
c. Matthew offers Steven 1 fish for 3 units of cheese.
d. Matthew offers Steven 1 unit of cheese for 3 fish
e. They cannot benefit from trade,

Answer 1

Option a. Steven offers Matthew 1 fish for 2 units of cheese is the mutually beneficial trade, as it falls between their respective opportunity costs and maximizes advantage from trade.

Step-by-step explanation:

The mutually beneficial terms of trade for both Steven and Matthew would be Steven offering Matthew 1 fish for 2 units of cheese. In this scenario, both individuals can trade based on their respective comparative advantages.

Steven can produce 10 units of cheese or 25 fish in a day. Therefore, his opportunity cost for producing 1 fish is 0.4 units of cheese (10 cheese / 25 fish). Matthew, on the other hand, can make 30 units of cheese or 10 fish. His opportunity cost for 1 fish is 3 units of cheese (30 cheese / 10 fish).

Thus, a trade where Steven offers 1 fish for less than 3 units of cheese is beneficial for Matthew, since it is below his opportunity cost. Conversely, any trade where Steven gives less than 0.4 units of cheese for 1 fish is beneficial for him. This makes option a, where Steven offers 1 fish for 2 units of cheese, mutually beneficial since it falls between the individual opportunity costs of each person.