Question

Suppose that Italy and Austria both produce fish and shoes. Italy’s opportunity cost of producing a pair of shoes is 5 pounds of fish, while Austria’s opportunity cost of producing a pair of shoes is 10 pounds of fish.
By comparing the opportunity cost of producing shoes in the two countries, you can tell that _____ has a comparative advantage in the production of shoes, and ______ has a comparative advantage in the production of fish.

Suppose that Italy and Austria consider trading shoes and fish with each other. Italy can gain from specialization and trade as long as it receives more than _______ of fish for each pair of shoes it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _______ of shoes for each pound of fish it exports to Italy.

Based on your answers to the previous question, which of the following terms of trade (that is, price of shoes in terms of fish) would allow both Austria and Italy to gain from trade? Check all that apply.

(A) 8 pounds of fish per pair of shoes
(B) 1 pound of fish per pair of shoes
(C) 15 pounds of fish per pair of shoes
(D) 3 pounds of fish per pair of shoes

Answer 1

Answer:

Section 1..... Italy has a comparative advantage in the production of shoes, and Austria has a comparative advantage in the production of fish.

Section 2.... 5 pounds of fish, ; 1/10 pairs of shoes

Section 3..... A and C.

Explanation:

The comparative advantage is known to be a term that is in use in the economic world,where a country or company has the ability of producing goods at extremely lower cost compared to that of its partners or competitors.

This is very important because, the country or company will be able to produce its goods by making use of fewer resources.

And thereby gives the country or company an edge in selling its goods at a reasonable lower price when compared with that of its competitors.

In this case, it is summarized or concluded that, Italy has a lower opportunity cost of producing shoes. So, Italy has a comparative advantage in shoes and Sweden has a comparative advantage in fish.