Question

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 consider trading olives and rye with each other. Greece can gain from specialization and trade as long as it receives more than ____ of rye for each crate of olives it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than _____   of olives for each bushel of rye it exports to Greece.

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

2 bushels of rye per crate of olives

8 bushels of rye per crate of olives

18 bushels of rye per crate of olives

6 bushels of rye per crate of olives

Answer 1

Opportunity cost is what you missed out on getting when you chose to do something else. The cost can be in dollars, time, or anything.

Greece can procduce 1 crate of olives or 4 bushels of rye, Sweden can produce 1 crate of olives or 10 bushels of rye.hence it is advantages for the Greece to produce crate because it can produce more crate with less opportunity cost and it it is advantages for Sweden to produce rye because it can produce more rye with less opportunity cost.

a) By comparing the opportunity cost of producing olives in the two countries, you can tell that Greece has a comparative advantage in the production of olives and Sweden has a comparative advantage in the production of rye.

b)

Suppose that Greece and Sweden consider trading olives and rye with each other. Greece can gain from specialization and trade as long as it receives more than 4 of rye for each crate of olives it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than 1/10 of olives for each bushel of rye it exports to Greece.

c) for 1 crate of olives any value less than 5 bushles of rye would not be acceptable by Greece and similarly in case of Sweden, any amount less than .1 crate of olives for 1 bushel of rye would not be acceptable.

8 bushels of rye per crate of olives.

6 bushels of rye per crate of olives