The dominican republic and nicaragua both produce coffee and rum. the dominican republic can produce 20 thousand tons of coffee per year or 10 thousand barrels of rum. nicaragua can produce 30 thousand tons of coffee per year or 5 thousand barrels of rum. at what minimum price at which these countries will trade rum is barrel per ton of coffee and the maximum price is barrel per ton of coffee?

If the Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in production, coffee and rum will be produced according to which country has a comparative advantage in the production of each good. Comparing their opportunity costs for producing coffee, we see that Nicaragua has a lower opportunity cost for producing coffee (1/6 of a barrel of rum, versus the Dominican Republic's opportunity cost of 1/2 barrel of rum). Nicaragua, therefore, should specialize in coffee. Comparing their opportunity costs for producing rum, we see that the Dominican Republic has a lower opportunity cost for producing rum (2 tons of coffee, versus 6 tons for Nicaragua). The Dominican Republic, therefore, should specialize in rum.

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