Question

5. The price of trade Suppose that Greece and Germany both produce oil and stained glass. Greece's opportunity cost of producing a pane of stained glass is 5 barrels of oil while Germany's opportunity cost of producing a pane of stained glass is 10 barrels of oil A- GREECE B- GERMANY By comparing the opportunity cost of producing stained glass in the two countries, you can tell that has a comparative advantage in the production of stained glass anda- GREECE has a comparative advantage in the production of oil B- Germany Suppose that Greece and Germany consider trading stained glass and oil with each other. Greece can gain from specialization and trade as long as it receives more than receives more than 1 ▼ of oil for each pane of stained glass it exports to Germany. Similarly, Germany can gain from trade as long as it 2 of stained glass for each barrel of oil 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 oil) would allow both Germany and Greece to gain from trade? Check all that apply. 1 barrel of oil per pane of stained glass 2 barrels of oil per pane of stained glass 6 barrels of oil per pane of stained glass 9 barrels of oil per pane of stained glass 1- a- 1 barrel b-1/10 barrel b-1/10 pane c- 1/5 barre 1/5 pane d- 5 barrel e-10 barrel a- 1 pane d-5 pane e- 10 pane

Answer 1

Greece will specialize in the production of stained glass as it has a comparative advantage in the production of stained glass.

Germany will specialize in the production of oil as it has a comparative advantage in the production of oil.

Greece can gain from specialization as long as it receives more than 5 barrels of oil for each pane of stained glass it exprts to Germany. This is because Greece can produce a pane of stained glass or 5 barrels of oil with equal resources. So as long as it gets more than 5 barrels of oil , it is gaining by specializing in the production of stained glass and trading it with Germany.

Germany can gain from specialization as long as it receives more than 1/10 pane of stained glass for each barrel of oil. This is because Germany can produce a pane of stained glass or 10  barrels of oil with equal resources. So as long as it gets more than 1/10 pane of stained glass , it is gaining by specializing in the production of oil and trading it with Greece.

Greece requires more than 5 barrels of oil for every pane of stained glass and Germany requires at least 1/10 pane of stained glass for every barrel of oil which also means that it will give less than 10 barrels of oil for each pane of stained glass. The first 2 options offer less than 5 barrels of oil for each pane of stained glass. So these two are not possible. The third and fourth options offer 6 barrels and 9 barrels for each pane of stained glass respectively. As both 6 and 9 are between 5 and 10 , prices of trade in option 3 and option 4 would allow both Germany and Greece to gain from trade.