Question

Suppose that Portugal and Switzerland both produce jeans and cheese. Portugal's opportunity cost of producing a pound of cheese is 5 pairs of jeans while Switzerland's opportunity cost of producing a pound of cheese is 10 pairs of jeans.
By comparing the opportunity cost of producing cheese in the two countries, you can tell that

[A) Portugal. B) Switzerland]

has a comparative advantage in the production of cheese and

[A) Portugal. B) Switzerland]

has a comparative advantage in the production of jeans.

Suppose that Portugal and Switzerland consider trading cheese and jeans with each other. Portugal can gain from specialization and trade as long as it 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 jeans) would allow both Switzerland and Portugal to gain from trade? Check all that apply. 3 pairs of jeans per pound of cheese O 15 pairs of jeans per pound of cheese 8 pairs of jeans per pound of cheese 9 pairs of jeans per pound of cheese
[A) 1 pair. B) 1/10 pair. C) 1/5 pair. D) 5 pairs. E) 10 pairs]

of jeans for each pound of cheese it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than

[A) 1 pound. B) 1/10 pound. C) 1/5 pound. D) 5 pounds. E) 10 pounds]

Answer 1

Answer:

a.  Portugal has comparative advantage in producing Cheese.

b. Switzerland has comparative advantage in producing Jeans.

c. 8 pairs of jeans per pound of Cheese

   9 pairs of jeans per pound of Cheese

d. The answer is D. 5 Jeans.

e. The answer is B. 1/10 Pound.

Explanation:

a. Portugal can produce 1 pound of Cheese for opportunity cost of 5 pairs of jeans whereas Switzerland can produce 1 pound of cheese for 10 pairs of Jeans, if Portugal imports jeans from Switzerland then it can get 10 jeans against 1 pound of cheese instead of 5 jeans which it can make at his own. So comparatively producing cheese is cheaper for Portugal.

b. referring to the explanation in requirement “a.” above Switzerland has benefit in producing jeans instead of producing Cheese.

c. Portugal can produce 1 pound of cheese for 5 pairs of jeans which suggests that during a trade receiving more than 5 pair of jeans for 1 pound of cheese will be beneficial for Portugal. Similarly Switzerland can produce 1 pound of cheese for 10 pairs of jeans, receiving 1 pound of cheese for less than 10 pairs of jeans can be beneficial for Switzerland.

• 3 pairs of jeans/ pound of cheese will be a loss for Portugal

• 15 pairs of jeans/pound of cheese will be a loss for Switzerland

• 8 pairs of jeans/ pound of cheese will provide gain to both countries

• 9 pairs of jeans/ pound of cheese will again provide gain to both countries  

d. Portugal should trade for more than 5 pairs of jeans for each pound of cheese to gain from the trade because 5 pairs of jeans is the cost it can produce at his own in the country.

e. Switzerland should receive atleast more than 1/10 pound of cheese against 1 pair of jeans to gain from the trade. Because if it produces in his own country 1 pair of jeans equals 1/10 pounds of cheese

(1 Pounds of cheese / 10 Pairs of Jeans)