Question

Suppose that Greece and Switzerland both produce rye and stained glass. Greece's opportunity cost of producing a pane of stained glass is 4 bushels of rye while Switzerland's opportunity cost of producing a pane of stained glass is 10 bushels of rye.

By comparing the opportunity cost of producing stained glass in the two countries, you can tell that (greece/switzerland) has a comparative advantage in the production of stained glass and (greece/ switzerland) has a comparative advantage in the production of rye.

Suppose that Greece and Switzerland consider trading stained glass and rye with each other. Greece can gain from specialization and trade as long as it receives more than ( 1brushel/ 1/10 brushel/ 1/4 brushel/ 4 brushel/ 10 brushel) of rye for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than ( 1pane/ 1/10 pane/ 1/4 pane/ 4 panes / 10 panes) of stained glass for each bushel of rye it exports to Greece.

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

3 bushels of rye per pane of stained glass

1 bushel of rye per pane of stained glass

18 bushels of rye per pane of stained glass

9 bushels of rye per pane of stained glass

Answer 1

Greece's opportunity cost of producing a pane of stained glass is 4 bushels of rye and Switzerland's opportunity cost of producing a pane of stained glass is 10 bushels of rye. Therefore, Greece's opportunity cost of producing a bushel of rye is (1/4) pane of stained glass and Switzerland's opportunity cost of producing a bushel of rye is (1/10) pane of stained glass.

Comparing the opportunity cost of producing stained glass in these two countries, you can tell that Greece has a comparative advantage in the production of stained glass because Greece's opportunity cost of producing 1 pane of stained glass is less than that of Switzerland's. And, Switzerland has a comparative advantage in the production of rye because it's opportunity cost of producing 1 bushel of rye is less than that of Greece's.

If they decide to trade, Greece can gain from specialization and trade as long as it receives more than it's opportunity cost of producing 1 pane of stained glass, that is, it will gain from trade as long as it receives more than 4 bushels of rye for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than (1/10) pane of stained glass (Switzerland's opportunity cost of producing 1 bushel of rye) for each bushel of rye it exports to Greece.

Therefore, to make both countries better off from trade, price of trade (price of stained glass in terms of rye) should lie between both countries opportunity cost of producing 1 pane of stained glass, that is, price of 1 pane of stained glass should lie between 4 bushels of rye and 10 bushels of rye.

Answer: 9 bushels of rye per pane of stained glass