Attempts: 5. The price of trade Suppose that Italy and Germany both produce beer
ID: 1128083 • Letter: A
Question
Attempts: 5. The price of trade Suppose that Italy and Germany both produce beer and cheese. Italy's opportunity cost of producing a pound of cheese is 5 barrels of beer while Keep the Highest: 13 Germany'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 has a comparative advantage in the production of cheese and- has a comparative advantage in the production of beer Suppose that Italy and Germany consider trading cheese and beer with each other. Italy can gain from specialization and trade as long as it receives more tharn more than of beer for each pound of cheese it exports to Germany. Similarly, Germany can gain from trade as long as it receives of cheese for each barrel of beer it exports to Italy. Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of beer) would allow both Germany and Italy to gain from trade? Check all that apply. 8 barrels of beer per pound of cheese 3 barrels of beer per pound of cheese 9 barrels of beer per pound of cheese 1 barrel of beer per pound of cheese Grade It Now Save & Continue Continue without savingExplanation / Answer
Italy's opportunity cost of producing 1 pound of cheese is 5 barrels of beer. So, Italy's opportunity cost of 1 barrel of beer = 1/5 pounds of cheese i.e. 0.2 pounds of cheese.
Germany's opportunity cost of producing 1 pound of cheese is 10 barrels of beer. So, Germany's opportunity cost of 1 barrel of beer = 1/10 pounds of cheese i.e. 0.1 pounds of cheese.
A country is said to have a comparative advantage in the production of a good when it has a lower opportunity cost in the production of that good as compared to another country. Italy has a lower opportunity cost in the production of Cheese and Germany has a lower opportunity cost in the production of beer.
Answer1: So, Italy has a comparative advantage in the production of cheese and Germany has a comparative advantage in the production of beer.
Answer 2: Italy's opportunity cost of producing 1 pound of cheese is 5 barrels of beer. So, Italy gains from specialization and trade as long as it received more than 5 barrels of beer for each pound of cheese it exports.
Germany's opportunity cost of 1 barrel of beer = 1/10 pounds of cheese i.e. 0.1 pounds of cheese. So, Germany gains from specialization and trade as long as it received more than 0.1 pounds of cheese for each barrel of beer it exports.
Answer 3:
Option 1: 8 barrels of beer per pound of cheese
Option 2: 9 barrels of beer per pound of cheese
Explanation: Option 2 and 4 will not be suitable for Italy as it needs minimum 5 bottles of beer for 1 pound of cheese. Option 4 will not be suitable for Germany as it needs more than 0.10 pounds of cheese for a bottle of beer but it is getting only 0.10 pounds of cheese for a bottle.
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