The figure below shows the production possibilities frontiers (PPFs) for Italy and India for their domestic production of olives and tea. Without trade, assume that each is consuming olives and tea at point a.
a. If Italy and India were to consider specialization and trade, what commodity would each specialize in? What is India’s opportunity cost for tea and olives? What is Italy’s opportunity cost for tea and olives?
b. Assume the two countries agree to specialize entirely in one product (Italy in olives and India in tea), and agree to split the total output between them. Complete the table below. Are both countries better off after trade?
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