Question

Suppose that Greece and Switzerland both produce beer and olives. Greece's opportunity cost of producing a crate of olives is 5 barrels of beer while Switzerland's opportunity cost of producing a crate of olives is 10 barrels of beer.
By comparing the opportunity cost of producing olives in the two countries, you can tell that has a comparative advantage in the production of olives and has a comparative advantage in the production of beer.

Suppose that Greece and Switzerland consider trading olives and beer with each other. Greece can gain from specialization and trade as long as it receives more than of beer for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than of olives for each barrel of beer it exports to Greece.

Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of beer) would allow both Switzerland and Greece to gain from trade? Check all that apply.

6 barrels of beer per crate of olives

11 barrels of beer per crate of olives

1 barrel of beer per crate of olives

7 barrels of beer per crate of olives

Answer 1

Answer:

Out of the following prices, the price of 7 barrels of beer per crate of olives would make the trade beneficial for both Greece and Switzerland.

Explanation:

• As we know that in Greece, a single crate of olive costs five barrels of beer. Where on the other hand, in Switzerland, one crate of olive costs ten barrels of beer.
• Hence, if Greece agrees on giving one crate of olives on every seven barrels (two barrels more than what it costs in Greece), the trade would be beneficial for Greece.
• Similarly, if one crate of olives costs seven barrels of beer instead of ten barrels, the trade would be beneficial for Switzerland too.