Suppose that Portugal and Germany both produce beer and olives. Portugal\'s oppo

Question

Suppose that Portugal and Germany both produce beer and olives. Portugal's opportunity cost of producing a crate of olives is 5 barrels of beer while Germany's opportunity cost of producing a crate of olives is 10 barrels of beer. By comparing the opportunity cost of producing olives in the two countries, you can tell that Portugal has a comparative advantage in the production of olives and Germany has a comparative advantage in the production of beer. Suppose that Portugal and Germany consider trading olives and beer with each other. Portugal can gain from specialization and trade as long as it receives more than receives more than of beer for each crate of olives it exports to Germany. Similarly, Germany can gain from trade as long as it of olives for each barrel of beer it exports to Portugal Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of beer) would allow both Germany and Portugal to gain from trade? Check all that apply. O 1 barrel of beer per crate of olives 15 barrels of beer per crate of olives 8 barrels of beer per crate of olives 9 barrels of beer per crate of olives

Explanation / Answer

Portugal benefits if it receives more than 2 barrels of beers for each olive crate (Because Opportunity cost is exactly double for Germany ).

Germany benefits if it receives more than 1 crate of olive for each 1 barrel of barrel.

Option one is correct in last question as exchanging 1 barrel of beer for 1 crate of olive oil will make both the countries better off as any other option makes one country worse off as there is no trade off.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.