Answer :
The terms of trade that will benefit both Saanvi and Tessa are those that involve exchanging the same number of scarves for the same number of hats, such as 4 scarves for 1 hat or 1 scarf for 1 hat. These terms of trade allow both individuals to specialize in producing the good in which they have a comparative advantage and trade with each other, resulting in both being better off.
In order to determine the terms of trade that will benefit both Saanvi and Tessa, you need to determine the opportunity cost of each good for each person. The opportunity cost of a good is the opportunity cost of the next best alternative that is given up in order to produce the good.
For Saanvi, the opportunity cost of one scarf is 1/4 hats, because she gives up the opportunity to produce 10/4=2.5 hats in order to produce 1 scarf. The opportunity cost of one hat is 4 scarves, because she gives up the opportunity to produce 40/10=4 scarves in order to produce 1 hat.
For Tessa, the opportunity cost of one scarf is 1 hat, because she gives up the opportunity to produce 25 hats in order to produce 25 scarves. The opportunity cost of one hat is 1 scarf, because she gives up the opportunity to produce 25 scarves in order to produce 25 hats.
Based on these opportunity costs, the terms of trade that will benefit both Saanvi and Tessa are:
- Saanvi trades 4 scarves for 1 hat with Tessa. In this case, Saanvi is giving up 4 scarves, which has an opportunity cost of 1 hat for her. Tessa is giving up 1 hat, which has an opportunity cost of 1 scarf for her. Therefore, both Saanvi and Tessa are better off after the trade.
- Tessa trades 1 scarf for 1 hat with Saanvi. In this case, Tessa is giving up 1 scarf, which has an opportunity cost of 1 hat for her. Saanvi is giving up 1 hat, which has an opportunity cost of 4 scarves for her. Therefore, both Saanvi and Tessa are better off after the trade.
Any other terms of trade that involve exchanging the same number of scarves for the same number of hats will also benefit both Saanvi and Tessa, because the opportunity cost of each good for each person will be equal.
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