Question

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 production of fish.

Suppose that Greece and Denmark consider trading stained glass and fish with each other. Greece can gain from specialization and trade as long as it receives more than (1 pound, 1/10 pound, 1/4 pound, 4 pounds, 10 pounds???)   of fish for each pane of stained glass it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than (1 pane, 1/10 pane, 1/4 pane, 4 panes, 10 panes???)   of stained glass for each pound of fish it exports to Greece.

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

A. 6 pounds of fish per pane of stained glass

B. 8 pounds of fish per pane of stained glass

C. 2 pounds of fish per pane of stained glass

D. 18 pounds of fish per pane of stained glass

Answer 1

Greece opportunity cost of producing stained glass = 4 pounds of fish.

Denmark opportunity cost of producing stained glass = 10 pounds of fish.

Because Greece has lower opportunity cost of producing pane . Therefore, Greece has a comparative advantage in production of stained glass. And Denmark has a comparative advantage in production of fish.

Greece can gains from trade as long as it receives more than 4 pounds of fish for each of stained glass it exports to Denmark. (Because this is the opportunity cost of producing stained glass in Greece).

Denmark can gains from trade as long as it receives more than 1/10 stained glass for each of fish it exports to Greece. (because this is the opportunity cost of producing fish in Denmark).

Between 4 pounds of fish per pane of stained glass and 10 pounds of fish per pane of stained glass, both countries gain from trade because if price more than 10 pounds of fish then, Greece would benefit from trade and if price below 4 pounds of fish then, Denmark would benefit from trade. And between these two both would benefit.

Therefore, (A) and (B) is correct. i.e 6 pounds of fish per pane of stained glass and 8 pounds of fish per pane of stained glass.