The price of trade Suppose that France and Austria both produce beer and wine. France's opportunity...

The price of trade

Suppose that France and Austria both produce beer and wine. France's opportunity cost of producing a bottle of wine is 4 barrels of beer while Austria's opportunity cost of producing a bottle of wine is 10 barrels of beer.

By comparing the opportunity cost of producing wine in the two countries, you can tell that has a comparative advantage in the production of wine and has a comparative advantage in the production of beer.

Suppose that France and Austria consider trading wine and beer with each other. France can gain from specialization and trade as long as it receives more than of beer for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than of wine for each barrel of beer it exports to France.

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

3 barrels of beer per bottle of wine

9 barrels of beer per bottle of wine

6 barrels of beer per bottle of wine

1 barrel of beer per bottle of wine

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Expert Solution

Rahul Sunny answered 1 year ago

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