Suppose you initially produce 1 cherry pie and 1 cheesecake, and your neighbor produces 1 cherry pie and 3 cheesecakes. After you decide to specialize and trade you produce 2 cherry pies and 0 cheesecakes, and your neighbor produces 0 cherry pies and 6 cheesecakes. What are the total gains from trade?

Question

BlackTom AI · Accepted Answer

We start by restating the scenario to compare pre-trade output with post-trade output. Pre-trade: you produce 1 cherry pie and 1 cheesecake, your neighbor produces 1 cherry pie and 3 cheesecakes. Total production before specialization: 2 cherry pies and 4 cheesecakes. After specialization and trade: you produce 2 cherry pies and 0 cheesecakes, your neighbor produces 0 cherry pies and 6 cheesecakes. Total production after specialization: 2 cherry pies and 6 cheesecakes.

Option A: 'there are no gains from trade' — This claim would be true if total output stayed the same. However, total output increases from 2 cherry pies and 4 cheesecakes to 2 cherry pies and 6 cheesecakes, an increase of 2 cheesecakes. Therefore, this option is incorrect because gains from trade exist.

Option B: '2 cherry pies, 6 cheesecakes' — This describes the post-specialization total output, not the gains from trade itself. While it is true that the combined production after trade is 2 pies and 6 cheesecakes, the gains from trade are the change relative to the pre-trade total, not the absolute post-trade totals. So this option does not answer the question about the magnitude of gains.

Option C: '2 cheesecakes' — This matches the increase in total output attributable to specialization and exchange: cheesecakes rise from 4 to 6, an increase of 2 cheesecakes, while cherry pies remain at 2. Thus the gains from trade, measured as the net increase in total production, equal 2 cheesecakes. This option correctly represents the gain.

Option D: '2 cherry pies' — Cherry pies do not increase with specialization in this setup (they stay at 2 total), so claiming a gain of 2 cherry pies is inconsistent with the actual change in total production. This makes the option incorrect.

In summary, the only choice that aligns with the reported improvement from pre-trade to post-trade production is the one that states the gain is 2 cheesecakes, since total output rises by 2 cheesecakes after specialization and trade.

ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

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