Suppose that Spain and Denmark both produce beer and wine. Spain's opportunity cost of producing a...

Suppose that Spain and Denmark both produce beer and wine. Spain's opportunity cost of producing a bottle of wine is 3 barrels of beer while Denmark's opportunity cost of producing a bottle of wine is 11 barrels of beer.

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

Suppose that Spain and Denmark consider trading wine and beer with each other. Spain can gain from specialization and trade as long as it receives more than ( 1 barrel, 1/11 barrel, 1/3 barrel, 3 barrels, 11 barrels) of beer for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than ( 1 barrel, 1/11 barrel, 1/3 barrel, 3 barrels, 11 barrels) of wine for each barrel of beer it exports to Spain.

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 Denmark and Spain to gain from trade? Check all that apply.

A.6 barrels of beer per bottle of wine

B.4 barrels of beer per bottle of wine

C.2 barrels of beer per bottle of wine

D.1 barrel of beer per bottle of wine

Expert Solution

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

b) Spain can gain from specialization and trade as long as it receives more than 3 barrels of beer for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than 1/11 barrel of wine for each barrel of beer it exports to Spain.

c) The price of trad should be more than 3 but less than 11 beer for a wine.

A and B are the right options.

Rahul Sunny answered 2 years ago

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