Question

Suppose that Greece and Switzerland both produce beer and olives. Greece's opportunity cost of producing a crate of olives is 5 barrels of beer while Switzerland's opportunity cost of producing a crate of olives is 10 barrels of beer.

By comparing the opportunity cost of producing olives in the two countries, you can tell that has a comparative advantage in the production of olives and has a comparative advantage in the production of beer.

Suppose that Greece and Switzerland consider trading olives and beer with each other. Greece can gain from specialization and trade as long as it receives more than of beer for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than of olives for each barrel of beer it exports to Greece.

Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of beer) would allow both Switzerland and Greece to gain from trade? Check all that apply.

6 barrels of beer per crate of olives

11 barrels of beer per crate of olives

1 barrel of beer per crate of olives

7 barrels of beer per crate of olives

Answer 1

Ans)
By comparing the opportunity cost of producing olives in the two countries, you can tell that GREECE has a comparative advantage in the production of olives and SWITZERLAND has a comparative advantage in the production of beer.
\This is because Greece has a lower opportunity cost of producing olives than Switzerland.

Suppose that Greece and Switzerland consider trading olives and beer with each other. Greece can gain from specialization and trade as long as it receives more than 5 barrels of beer for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than 0.1 of olives for each barrel of beer it exports to Greece.
\Greece and Switzerland would want more than what they could produce in autarky.

6 barrels of beer per crate of olives
7 barrels of beer per crate of olives
\Any value less than 5 would not be acceptable by Greece