Spain can produce 125 barrels of wine or 250 bottles of olive oil per day. Italy...

Spain can produce 125 barrels of wine or 250 bottles of olive oil per day. Italy can produce 240 barrels of wine or 300 bottles of olive oil per day.

Who has the absolute advantage in producing wine? Who has the absolute advantage in producing olive oil?
What is Spain's opportunity cost of producing one barrel of wine? What is Spain's opportunity cost of producing one bottle of olive oil?
What is Italy's opportunity cost of producing one barrel of wine? What is Italy's opportunity cost of producing one bottle of olive oil?
Who has the comparative advantage in producing wine? Who has the comparative advantage in producing olive oil?

Solutions

Expert Solution

Italy has the absolute advantage in producing wine. Also, Italy has the absolute advantage in producing olive oil. This is because Italy can produce more of both products in a day than Spain.

Spain's opportunity cost of producing one barrel of wine = Olive oil given up/Wine produced = 250/125 = 2 bottles of olive oil
Spain's opportunity cost of producing one bottle of olive oil = Wine given up/Olive oil produced = 125/250 = 0.5 barrel of wine

Italy's opportunity cost of producing one barrel of wine = Olive oil given up/Wine produced = 300/240 = 1.25 bottles of olive oil
Italy's opportunity cost of producing one bottle of olive oil = Wine given up/Olive oil produced = 240/300 = 0.8 barrel of wine

Italy has the comparative advantage in producing wine because its opportunity cost of a barrel of wine is lower than Spain's. Spain has the comparative advantage in producing olive oil because its opportunity cost of a bottle of olive oil is lower than Italy's.

Rahul Sunny answered 1 year ago

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