Question

Suppose that Greece and Austria both produce jeans and stained glass. Greece's opportunity cost of producing a pane of stained glass is 5 pairs of jeans while Austria's opportunity cost of producing a pane of stained glass is 10 pairs of jeans. By comparing the opportunity cost of producing stained glass in the two countries, you can tell thatGreece has a comparative advantage in the production of stained glass andAustria has a comparative advantage in the production of jeans. Suppose that Greece and Austria consider trading stained glass and jeans with each other. Greece can gain from specialization and trade as long as it receives more than5 pairs of jeans for each pane of stained glass it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than1/10 pane of stained glass for each pair of jeans it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of jeans) would allow both Austria and Greece to gain from trade? Check all that apply. a. 9 pairs of jeans per pane of stained glass. b. 3 pairs of jeans per pane of stained glass. c. 1 pair of jeans per pane of stained glass. d. 8 pairs of jeans per pane of stained glass

Answer 1

Answer:

a. 9 pairs of jeans per pane of stained glass.

d. 8 pairs of jeans per pane of stained glass.

Explanation:

Greece and Austria both produce jeans and stained glass. Greece opportunity cost is 5 pairs of jeans per stained glass and Austria opportunity cost 10 pairs jeans per stained glass. Greece has comparative advantage in producing stained glass whereas Austria has comparative advantage in producing Jeans.

If these both countries agree to trade with each other, the trade would be beneficial if Greece receives more than 5 pairs of jeans per pane of stained glass. If the trade took place at more than 5 pairs of jeans for per pane of stained glass it will be beneficial for both countries. Option a and option d has more than 5 pairs of jeans. Option b has 3 pairs of jeans so the trade is not beneficial for either countries and option c has 1 pair of jeans per pane of stained glass which also a trade not suitable to both countries.