Question

The price of trade Suppose that Italy and Germany both produce beer and cheese. Italy's opportunity cost of producing a pound of cheese is 5 barrels of beer while Keep the Highest: 13 Germany's opportunity cost of producing a pound of cheese is 10 barrels of beer. By comparing the opportunity cost of producing cheese in the two countries, you can tell that ▼ has a comparative advantage in the production of cheese and- ▼ has a comparative advantage in the production of beer Suppose that Italy and Germany consider trading cheese and beer with each other. Italy can gain from specialization and trade as long as it receives more tharn more than ▼ of beer for each pound of cheese it exports to Germany. Similarly, Germany can gain from trade as long as it receives ▼ of cheese for each barrel of beer 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 beer) would allow both Germany and Italy to gain from trade? Check all that apply.
8 barrels of beer per pound of cheese
3 barrels of beer per pound of cheese
9 barrels of beer per pound of cheese
1 barrel of beer per pound of cheese

Answer 1

Explanation:

Italy's opportunity cost of producing a pound of cheese is

= 5 barrels of beer

Germany's opportunity cost of producing a pound of cheese is

= 10 barrels of beer

Italy's opportunity cost of producing a barrel of beer is

= $\frac{1}{5}$

= 0.2 pounds of cheese

Germany's opportunity cost of producing a barrel of beer is

=  $\frac{1}{10}$

= 0.1 pounds of cheese

Italy has a comparative advantage in producing cheese, while Germany has a comparative advantage in producing beer.

A country is said to be enjoying a comparative advantage if it can produce a good at a lower opportunity cost.

Italy can gain from trade if it is getting more than 5 barrels of beer for each pound of cheese. Similarly, Germany can gain from trade if it is getting more than 0.1 pounds of cheese.

Both the countries will gain from the trade if the price of trade is 8 barrels of beer per pound of cheese  and 9 barrels of beer per pound of cheese.

Italy will not accept 3 barrels of beer per pound of cheese and 1 barrel of beer per pound of cheese because it is not covering the opportunity cost.