3. The price of trade Suppose that Portugal and Austria both produce beer and ch

Question

3. The price of trade Suppose that Portugal and Austria both produce beer and cheese. Portugal's opportunity cost of producing a pound of cheese is 5 barrels of beer while Austria's opportunity cost of producing a pound of cheese is 10 barrels of beer has a comparative advantage in the By comparing the opportunity cost of producing cheese in the two countries, you can tell that production of cheese and has a comparative advantage in the production of beer Suppose that Portugal and Austria consider trading cheese 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 pound of cheese it exports to Austria. Similarly, Austria can gain from trade as long as it of cheese 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 cheese in terms of beer) would allow both Austria and Portugal to gain from trade? Check all that apply 1 barrel of beer per pound of cheese 15 barrels of beer per pound of cheese 9 barrels of beer per pound of cheese 8 barrels of beer per pound of cheese

Explanation / Answer

Answer

first blank: Portugal.......A country has comparative advantage in a good which it has lower opportunity cost
Sec ond blank: Austria.......The comparative advantage is mutually exclusive even for two goods economy
Third blank: 5 barrel of beer....the opportunity cost shows the minimum trade border
Fourth blank: 0.1 pounds of cheese
the 10 barrels in term of one barrel beer is 0.1 pound of cheese
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Both country gain from trade if the exchange is between 5 to barrel of beer with one pound of cheese
option: third and fourth are true

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