Answer:
With specialization Iran will be able to consume 1.7 bottles of olive oil.
Explanation:
Iran produces 4 barrels of oil and 6 bottles of olive oil.
Iraq produces 4 barrels of oil and 4 bottles of olive oil.
The opportunity cost of producing a barrel of oil for Iran
=
= 1.5
The opportunity cost of producing a barrel of oil for Iraq
=
= 1
Iraq has a lower opportunity cost for producing oil so we can say it has a comparative advantage in producing oil.
The opportunity cost of producing a barrel of olive oil for Iran
=
= 0.66
The opportunity cost of producing a barrel of olive oil for Iraq
=
= 1
Iran has a lower opportunity cost for producing olive oil so we can say it has a comparative advantage in producing it.
The terms of trade with specialization are 4 barrels of oil for 4.3 bottles of olive oil, and that 4 barrels of oil are indeed traded for 4.3 bottles of olive oil.
Without trade, Iran is consuming 4 barrels of oil and 6 bottles of olive oil.
With specialization, Iran will be able to consume
= 6 - 4.3
= 1.7 bottles of olive oil
