Question

5. The price of trade Suppose that Italy and Denmark both produce fish and olives. Italy's opportunity cost of producing a crate of olives is S pounds of fsh white Denmark's opportunity cost of producing a crate of olives is 10 pounds of fish 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 y has a comparative advantage in the production of fish. consider trading olives and fish with each other. Italy can gain from specialization and trade as long as it receives of fish for each crate of olives it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more more than of olives for each pound of fish it exports to Italy Based on your answer to the last question, which of the following of trade (that is, price of olives in terms of fish) would allow both Denmark and Italy to gain from trade? Check aw that apply. O 15 pounds of fish per crate of olives 3 pounds of fish per crate of olives 8 pounds of fish per crate of olives 1 pound of fish per crate of olives MacBook Pro

Answer 1

Opportunity cost is the value of the next best alternative.

Italy has a comparative advantage in the production of olives because its cost of producing a crate of olives is 5 pounds of fish, whereas, Denmark’s opportunity cost is 10 pounds of fish.

Denmark has comparative advantage in the production of fish, since it costs 1/10th of a crate of olives, whereas, it costs 1/5^th for Italy.

The price must be greater than the opportunity cost of the seller and less than the opportunity cost of the buyer. The terms of trade should lie between the opportunity cost of the buyer and seller to be beneficial to both.

Italy can gain from trade as long as it receives more than 5 pounds of fish and Denmark can gain from trade as long as it receives more than 1/10th crate of olives99.

Answer is 8 pounds of fish for one crate of olives.