Question

Suppose that Greece and Germany both produce oil and cheese. Greece's opportunity cost of producing a pound of cheese is 3 barrels of oil while Germany's opportunity cost of producing a pound of cheese is 11 barrels of oil. By comparing the opportunity cost of producing cheese in the two countries, you can tell that has a comparative advantage in the has a comparative advantage in the production of oil. production of cheese and Suppose that Greece and Germany consider trading cheese and oil with each other. Greece can gain from specialization and trade as long as it receives more than of oil for each pound of cheese it exports to Germany. Similarly, Germany can gain from trade as long as it of cheese for each barrel of oil it exports to Greece. receives more than 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 Germany and Greece to gain from trade? Check all that apply. 6 barrels of oil per pound of cheese 4 barrels of oil per pound of cheese 13 barrels of oil per pound of cheese 2 barrels of oil per pound of cheese

Answer 1

It is given that the opportunity cost of producing a pound of cheese is 3 barrels of oil for Greece and 11 barrels of oil for Germany. So, the opportunity cost of producing a barrel of oil is 1/3 pound of cheese for Greece and 1/11 barrels of oil for Germany.

So, Greece has the comparative advantage in the production of cheese because it's opportunity cost of producing cheese is less than the Germany's opportunity cost of producing a pound of cheese. Similarly, Germany has the comparative advantage in the production of oil because it's opportunity cost of producing oil is less than the Greece's opportunity cost of producing a barrel of oil.

So, Greece specializes in the production of cheese and Germany is specialized in the production of oil.

Greece will gain from specialization and trade if it receives more than 3 barrels of oil for a pound of cheese it exports to Germany and Germany will gain from specialization and trade if it receives more thyan 1/11 pound of cheese for each barrel of oil it exports to Greece.

Both countries would gain from trade if the price of trade is less than both countries' opportunity cost of producing the good in hich they specialize. So, both countries would be better off if the price of trade is 6 barrels of oil per pound of cheese and 4 barrels of oil per pound of cheese. Therefore, the correct answers are 'Option A' and 'Option B'.

Answer 2

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