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

Suppose that Spain and Denmark both produce oil and wine. Spain's opportunity cost of producing a bottle of wine is 4 barrels of oil while Denmark's opportunity cost of producing a bottle of wine is 11 barrels of oil.

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 oil.

Suppose that Spain and Denmark consider trading wine and oil with each other. Spain can gain from specialization and trade as long as it receives more than [ ] of oil for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than [ ] of wine for each barrel of oil 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 oil) would allow both Denmark and Spain to gain from trade? Check all that apply.

( )3 barrels of oil per bottle of wine

( )7 barrels of oil per bottle of wine

( )9 barrels of oil per bottle of wine

( )1 barrel of oil per bottle of wine

Expert Solution

[Spain] has a comparative advantage in the production of wine and [ Denmark] has a comparative advantage in the production of oil.
(As Spain's opportunity cost of producing a bottle of wine is lower so it has comparative advantage in wine and Denmark has comparative advantage in oil).

Spain can gain from specialization and trade as long as it receives more than [ 4 barrels ] of oil for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than [1/11 or 0.09 bottle ] of wine for each barrel of oil it exports to Spain.
(As Spain's opportunity cost of producing a bottle of wine = 4 barrels of oil so it will gain from trade as long as it receives more than 4 barrels of oil. Denmarks's opportunity cost of a barrel of oil = 1/Denmarks's opportunity cost of a bottle of wine = 1/11 = 0.09 bottle of wine. So, it will gain from trade as long as it receives more than 1/11 or 0.09 bottle of wine)

7 barrels of oil per bottle of wine
9 barrels of oil per bottle of wine
(Terms of trade should lie between 4 barrels and 11 barrels of oil for both of them to gain from trade)

Rahul Sunny answered 2 years ago

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...

Suppose that Spain and Switzerland both produce beer and cheese. Spain's opportunity cost of producing a...

Suppose that Spain and Switzerland both produce beer and cheese. Spain's opportunity cost of producing a pound of cheese is 5 barrels of beer while Switzerland'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 (Spain/Switzerland) has a comparative advantage in the production of cheese and (Spain/Switzerland) has a comparative advantage in the production of beer. Suppose that Spain and...

Suppose that Greece and Denmark both produce fish and stained glass. Greece's opportunity cost of producing...

Suppose that Greece and Denmark both produce fish and stained glass. Greece's opportunity cost of producing a pane of stained glass is 4 pounds of fish while Denmark's opportunity cost of producing a pane of stained glass is 10 pounds of fish. By comparing the opportunity cost of producing stained glass in the two countries, you can tell that (Denmark, Greece???) has a comparative advantage in the production of stained glass and (Denmark, Greece???) has a comparative advantage in the...

The price of trade Suppose that Italy and Denmark both produce oil and olives. Italy's opportunity...

The price of trade Suppose that Italy and Denmark both produce oil and olives. Italy's opportunity cost of producing a crate of olives is 4 barrels of oil while Denmark's opportunity cost of producing a crate of olives is 10 barrels of oil. By comparing the opportunity cost of producing olives in the two countries, you can tell that has a comparative advantage in the production of olives and has a comparative advantage in the production of oil. Suppose that...

Suppose that France and Germany both produce rye and shoes. France's opportunity cost of producing a...

Suppose that France and Germany both produce rye and shoes. France's opportunity cost of producing a pair of shoes is 4 bushels of rye while Germany's opportunity cost of producing a pair of shoes is 10 bushels of rye. By comparing the opportunity cost of producing shoes in the two countries, you can tell that (France, Germany) has a comparative advantage in the production of shoes and (France, Germany) has a comparative advantage in the production of rye. Suppose that France...

Suppose that Greece and Sweden both produce rye and olives. Greece's opportunity cost of producing a...

Suppose that Greece and Sweden both produce rye and olives. Greece's opportunity cost of producing a crate of olives is 4 bushels of rye while Sweden's opportunity cost of producing a crate of olives is 10 bushels of rye. By comparing the opportunity cost of producing olives in the two countries, you can tell that ____ has a comparative advantage in the production of olives and__ has a comparative advantage in the production of rye. Suppose that Greece and Sweden...

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...

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...

Spain and France can both grow grapes for wine, or raise pigs for ham. Suppose that...

Spain and France can both grow grapes for wine, or raise pigs for ham. Suppose that with one acre of land, Spain can produce 10 barrels of wine or 10 pigs, while France can produce 15 barrels of wine or 12 pigs. (a) Which country has the absolute advantage for each item? What about compara- tive advantage? (b) If they should trade, which country should specialize in which good? (c) Draw a Production Possibilities Frontier for each country, assuming 10...

France and England both produce wine and cloth with constant opportunity costs. France can produce 150...

France and England both produce wine and cloth with constant opportunity costs. France can produce 150 barrels of wine if it produces no cloth or 100 bolts of cloth if it produces no wine. England can produce 50 barrels of wine if it produces no cloth or 150 bolts of cloth if it produces no wine. When international trade takes place, each country specializes completely in the production of the good in which it has a comparative advantage: 1 barrel...

Question