Maximizing Trade Benefits in a Simple Economy: Chicken and Vegetables Exchange

What is the expected exchange rate between chicken and vegetables in this simple economy?

What is the minimum amount of vegetables that one pound of chicken should trade for? What is the maximum amount of vegetables that one pound of chicken can trade for?

Answer:

1. 4 pounds of Vegetable

2. 5 pounds of Vegetable

When John and George decide to specialize and exchange with each other in this simple economy, the exchange rate between chicken and vegetables plays a crucial role in maximizing trade benefits. The exchange rate is determined by the opportunity cost for each producer regarding the two goods.

John can produce either 40 pounds of vegetables or 10 pounds of chicken. Thus, the opportunity cost for John to produce one pound of chicken is 4 pounds of vegetables (40/10 = 4). On the other hand, George can produce either 25 pounds of vegetables or 5 pounds of chicken, resulting in an opportunity cost of 5 pounds of vegetables for one pound of chicken (25/5 = 5).

For trade to be mutually beneficial, the exchange rate should be such that one pound of chicken trades for more than John's opportunity cost of 4 pounds of vegetables, but less than George's opportunity cost of 5 pounds of vegetables. Therefore, we can expect one pound of chicken to trade for at least 4.00 pounds of vegetables but not more than 5.00 pounds of vegetables. This ensures that both John and George benefit from the exchange by maximizing their respective production capabilities.