Question

Suppose that Spain and Austria both produce fish and olives. Spain's opportunity cost of producing a crate of olives is 5 pounds of fish while Austria'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 thatSpain has a comparative advantage in the production of olives andAustria has a comparative advantage in the production of fish. Suppose that Spain and Austria consider trading olives and fish with each other. Spain can gain from specialization and trade as long as it receives more than5 pounds of fish for each crate of olives it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than1/5 crate of olives for each pound of fish it exports to Spain. Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of fish) would allow both Austria and Spain to gain from trade
12 pounds of fish per crate of olives

2 pounds of fish per crate of olives

9 pounds of fish per crate of olives

6 pounds of fish per crate of olives

Answer 1

Answer:

Spain has a comparative advantage in the production of olives and;

Austria has a comparative advantage in the production of fish

9 pounds of fish per crate of olives (being more favorable to Spain)

6 pounds of fish per crate of olives (being more favorable to Austria)

Explanation:

Spain renounce to 5 pounds of fish to produce olives while Austria to 10

threfore is much better in competitive term for Spain as the opportunity cost is lower

The opposite is true for Autria regarding fish production. is better producing that as renounce to less olives than Spain

Austria will sale above purchase olive for less than 10

while Spain will sale for more than 5

Given this requirement there are two options which allow for trade and generate gain for both countries.