Question

Suppose that Italy and Switzerland both produce rye and wine. Italy's opportunity cost of producing a bottle of wine is 5 bushels of rye while Switzerland's opportunity cost of producing a bottle of wine is 10 bushels of rye.

By comparing the opportunity cost of producing wine in the two countries, you can tell that, ITALY or SWITZERLAND, has a comparitive advantage in the production of wine and, ITALY or SWITZERLAND, has a comparative advantage in the production of rye.

Suppose that Italy and Switzerland consider trading wine and rye with each other. Italy can gain from specialization and trade as long as it receives more than

1 bushel

1/10 bushel

1/5 bushel

5 bushels

10 bushels

of rye for each bottle of wine it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than

1 bottle

1/10 bottle

1/5 bottle

5 bottles

10 bottles

of wine for each bushel of rye it exports to Italy.

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

12 bushels of rye per bottle of wine

1 bushel of rye per bottle of wine

2 bushels of rye per bottle of wine

6 bushels of rye per bottle of wine

Answer 1

Suppose that Country I and Country S both produce rye and wine. Country Is opportunity cost of producing a bottle of wine is 5 bushels of rye, while Country S's opportunity cost of producing a bottle of wine is 10 barrels of rye By comparing the opportunity cost of producing wine in the two countries, you can tell that Country I has a has a comparative advantage in the production of rye comparative advantage in the production of wine and Country S Suppose that Country I and Country S consider trading wine and rye with each other. Country I can bushels of rye for each bottles of wine it exports to Country S. gain from specialization and trade as long as it receives more than 1 bottles of 10 Similarly, Country S can gain from trade as long as it receives more than wine for each bushel of rye it exports to Country I. Based on your answer to the last question, which of the following terms of trade (that is, price of wine in terms of rye) would allow both Country S and Country I to gain from trade? Check all that apply 6 bushels of rye per bottles of wine