Question

suppose that France and Denmark both produce oil and cheese

ttempts: 5. The price of trade Suppose that France and Denmark both produce oil and cheese. France's opportunity cost of producing a pound of cheese is 4 barrels of oil while Denmark's opportunity cost of producing a pound of cheese is 10 barrels of oil. By comparing the opportunity cost of producing cheese in the two countries, you can tell that production of cheese and has a comparative advantage in the production of oil. has a comparative advantage in the Suppose that France and Denmark consider trading cheese and oil with each other. France can gain from specialization and trade as long as it receives more tharn than of oil for each pound of cheese it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more of cheese for each barrel of oil it exports to France. Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of oil) would allow both Denmark and France to gain from trade? Check all that apply. 18 barrels of oil per pound of cheese 2 barrels of oil per pound of cheese 1 barrel of oil per pound of cheese s barrels of oil per pound of cheese ch

Answer 1

Answer - by comparing the oppertoppor cost of producing cheese in two countries, you can that FRANCE​ has a competitive advantage in production of cheese and DENMARK has competitive advantage in production of oil.

Reason - France need to sacrifice 4 barrel of oil to produce one pound of cheese whereas Denmark needs to sacrifice 10 barrels of oil to produce same amount of cheese, so here France has a competitive advantage.

On the other hand, Denmark produces 10 barrel of oil by sacrificing one pound of cheese, whereas France can produce only 4 barrel of oil by sacrificing same one pound of cheese. So Denmark has an edge in producing oil.

Answer - suppose France and Denmark consider trading cheese and oil with each other. France can gain from specialisation and trade as long as it receives more than 4 BARRELS of oil for each pound of cheese it exports to Denmark. Similarly Denmark can gain from trade as long as it receives more than 1/10 POUND of cheese for each barrel of oil it exports to France.

Reason - France has an edge in producing cheese and domestically if it gives off one pound of cheese it's getting 4 barrel of oil. So France would gain from trade only if it receives more than 4 barrel oil from trade.

Denmark has an edge in producing oil and domestically it sacrifices 1/10 pound of cheese to produce 1 barrel of oil. So Denmark will gain from trade only if it receives more than 1/10 pound of cheese by sacrificing 1 barrel of oil.

Answer - 8 barrel of oil per pound of cheese

Reason - They can only both gain if the price lies between what they each pay in oil for a pound of cheese. France pays 4 and Denmark pays 10 if they produce domestically. At 8 and only 8 among the choices, can France sell cheese at a profit and demark purchase cheese for less than it pays domestically.

Here in trade of 8 barrel of oil per pound of cheese France is getting 8 barrel of oil by sacrificing one pound of cheese where as domestically it gets only 4 barrel of oil. Whereas Denmark is giving only 8 barrels of oil to get one pound of cheese whereas locally it was sacrificing 10 barrel of oil to get one pound of cheese.

So at a trade or 8 barrel of oil per pound of cheese both France and Denmark will gain from trade.

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