Suppose there are two individuals, Casey and Rick, who live in a very simplified world where only two goods are produced and consumed: spaghetti and tomato sauce. The production opportunity cost for Casey is 7.00 kilograms of spaghetti for every kilogram of tomato sauce. Rick has a production opportunity cost of 5.00 kilograms of spaghetti for every kilogram of tomato sauce Eventually Casey realizes that through trade, both individuals can be better off and Rick is willing to trade. What price can be settled between these two parties such that both individuals can enjoy more of spaghetti and tomato sauce?
Trade is possible when both the parties specialise in the production of the commodity they have comparative... View the full answer