Question

Suppose that Greece and Germany both produce rye and wine. Greece's opportunity cost of producing a bottle of wine is 4 bushels of rye while Germany'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 Germany production of wine and_Greece has a comparative advantage in the production of rye. has a comparative advantage in the Suppose that Greece and Germany consider trading wine and rye with each other. Greece can gain from specialization and trade as long as it receives more than1 bushelof rye for each bottle of wine it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than 4 bottles of wine 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 wine in terms of rye) would allow both Germany and Greece to gain from trade? Check all that apply. O 6 bushels of rye per bottle of wine O 18 bushels of rye per bottle of wine 8 bushels of rye per bottle of wine 1 bushel of rye per bottle of wine Grade It Now Save & Continue Continue without saving

Answer 1

A country will have comparative advantage in production of a good if it's opportunity cost of producing that good is lower than that of it's opponent's.

So, here comparing the opportunity cost we can conclude that, Greece has a comparative advantage in the production of the wine (because Greece's opportunity cost of producing 1 bottle of wine is 4 bushels of rye which is less than Germany's opportunity cost of producing 1 bottle of wine). Therefore, Germany will have comparative advantage in the production of the other good that is rye.

Now if they specialize in the production in which they have comparative advantage, then Greece will produce wine only and Germany will produce rye oonly.Greece will gain from trade as long as it receives more than 4 bushels of rye for each bottle of wine it exports to Germany (because Greece's opportunity cost of producing 1 bottle of wine is 4 bushels of rye).

On the other hand, Germany's opportunity cost of producing one bushel of rye is (1/10) bottle of wine. So, it will gain from trade as long as it gets more than (1/10) bottle of wine for each bushel of rye it exports to Greece.

Both countries will gain from trade as long as price of wine lies between both countries' opportunity cost of producing 1 bottle of wine, i.e. as long as price of wine lies between 4 and 10 bushels of rye.

Answer: 6 bushels of rye per bottle of wine and 8 bushels of rye per bottle of wine