Suppose there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat. For Iowa the opportunity cost of producing 1 bushel of wheat is 3 bushels of corn. For Nebraska the opportunity cost of producing 3 bushels of wheat is 1 bushel of corn. At present, Iowa produces 60 million bushels of wheat and 360 million bushels of corn, while Nebraska produces 60 million bushels of corn and 360 million bushels of wheat.
a. Explain how, with trade, Nebraska can end up with 80 million bushels of wheat and 360 million bushels of corn while Iowa can end up with 80 million bushels of corn and 360 million bushels of wheat.
To maximize production of both states, Iowa should produce____million bushels of corn and___ million bushels of wheat, while Nebraska should produce___million bushels of wheat and___million bushels of corn. Iowa can trade a maximum of___million bushels of corn for the___million bushels of wheat that it needs. Nebraska can trade a maximum of___million bushels of wheat for the___million bushels of corn it needs.
b. If the states ended up with the numbers given in a, assuming the person who arranges the trade (the trader) gets the remainder, how much would the trader get?