Saudi Arabia produces oil more cheaply than Iran but the opportunity cost of producing oil in Saudi Arabia is higher than in Iran. Saudi Arabia produces figs more cheaply than Iran but the opportunity cost of producing figs in Saudi Arabia is lower than in Iran. Should they trade? Who should produce what?
a. No, Saudi Arabia is more efficient in both oil and figs and will lose by trading.
b
Yes, because Saudi Arabia has an absolute advantage in figs, it should produce figs and Iran should produce oil.
c. Yes, because Saudi Arabia has a comparative advantage in oil, it should produce oil and Iran produce figs.
d. Yes, because Iran has a comparative advantage in oil, it should produce oil and Saudi Arabia produce figs.
e. No, because the terms of trade would be negative for Iran.
D
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