Question

Suppose that Italy and Germany both produce rye and cheese. Italy's opportunity cost of producing a pound of cheese is 5 bushels of rye while Germany's opportunity cost of producing a pound of cheese is 10 bushels of rye.
By comparing the opportunity cost of producing cheese in the two countries, you can tell that ? ( Italy OR Germany? ) has a comparative advantage in the production of cheese and ? ( Italy OR Germany? ) has a comparative advantage in the production of rye.

Suppose that Italy and Germany consider trading cheese and rye with each other. Italy can gain from specialization and trade as long as it receives more than ? (1 bushel , 1/10 bushel,1/5 bushel,5 bushel,10 bushel ?) of rye for each pound of cheese it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than ? (1 pound , 1/10 pound ,1/5 pound ,5 pound ,10 pound ?) of cheese for each bushel of rye it exports to Italy.
Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of rye) would allow both Germany and Italy to gain from trade? Check all that apply.

6 bushels of rye per pound of cheese
7 bushels of rye per pound of cheese
4 bushels of rye per pound of cheese
1 bushel of rye per pound of cheese

Answer 1

Answer:

Italy has a comparative advantage in the production of cheese.

Germany has a comparative advantage in the production of rye.

5 bushels of rye

1/10 pound of cheese

6 bushels of rye per pound of cheese

7 bushels of rye per pound of cheese

Explanation:

Italy: 1 pound of cheese = 5 bushels of rye

Germany: 1 pound of cheese = 10 bushels of rye

Therefore, the opportunity cost of producing one pound of cheese in Italy is lower than the cost of producing one pound of cheese in Germany, which means that Italy has a comparative advantage in the production of cheese. The opposite can be said about rye since it costs the Germans only half a pound of cheese to produce 5 bushels of rye, while it costs the Italians a whole pound. Therefore, Germany has a comparative advantage in the production of rye.

This means that Italy can gain from specialization if it gains more than 5 bushels of rye for each pound of cheese.

As for Germany, can gain from specialization if it gains more than 1/10 pound of cheese for each bushel of rye.

Therefore, from the alternatives presented, the following would represent a gain from trade for both countries:

6 bushels of rye per pound of cheese

7 bushels of rye per pound of cheese