calculate the gains from trade calculate the gains from trade calculate the gain
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calculate the gains from trade calculate the gains from trade calculate the gains from trade MINDTAP Q Search this course Homework (Ch 03) Suppose that Italy and Austria both produce rye and cheese. Ital's ortunity cost of producing a pound of cheese s S bushs of rye whde Austra's opportunity cost of produang a pound of cheese is iO bushels of rye. By comparing the opportunity cost of producing cheese in the two countries, you can tell that of cheese and has a comparative advantage in the production has a comparative advantage in the production of rye. Suppose that Italy and Austria consider trading cheese and rye with each other. Italy can gain from specialization and trade as long as it recetves more than than ? of rye for each pound of cheese it exports to Austria. Smlarly, Austria can gain from trade as long as it receives more of cheese for each bushel of rye 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 rye) would allow both Austria and Italy to gain from trade? Check al that apply 6 bushels of rye per pound of cheese D 9 bushels of rye per pound of cheese D 1 bushel of rye per pound of cheese 2 bushels of rye per pound of cheese O Type here to searchExplanation / Answer
As the opportunity cost of producing a pound of cheese is less in Italy than Austria which also implies that the opportunity cost of producing one bushel of rye is less in Austria.
Italy has a comparative advantage in the production of cheese and
Austria has a comparative advantage in the production of rye.
- Suppose that Italy and Austria consider trading......
Italy can gain from trade as long as it receives more than 5 bushels of rye for each pound of cheese it export.( It is so because the opportunity cost of producing one cheese is 5 bushels of rye if it do not trade so if it trade and get any gain then it must trade 1 pound of cheese for more than 5 bushels of rye).
Similarly, Austria can gain from trade as long as it receives more than 1/10 pound of cheescheese for each bushels of rye.
( It is so because the opportunity cost of producing one cheese is 10 bushels of rye, it implies that the opportunity cost of producing one bushels of rye is 1/10 pound of cheese, so the trade is only profitable for rye if it get more than 1/10 pound of cheese in exchange of 1 bushels of rye).
Based on the above answer, all that apply :
- 6 bushels of rye per pound of cheese:
For Italy :
Without trade, Italy will only get 5 bushles of rye for each pound of cheese while from trade it get 6 bushles of rye, it means this trade is beneficial for Italy so it will trade.
for Austria:
Without trade, For each pound of cheese, it have to sacrifice 10 bushels of rye, while with this trade it only have to import 6 bushels of rye and get same one pound of cheese so it is beneficial for Austria, It will trade.
- 9 bushels of rye per pound of cheese
it is so because :
For Italy:
If it do not trade for each pound of cheese it get 5 bushels of rye, but with trade it get 9 bushels of rye for each cheese. It means it is beneficial for Italy, so Italy will trade.
For Austria:
If it do not trade, then for each pound of cheese, it have to sacrifice 10 bushels of rye, while with trade it only have to sacrifice 9 units of rye ( as it import) so it is beneficial for Austria also. So Austria will trade.
Not apply-
- 1 bushle of rye per pound of cheese, so Italy will not be beneficial because if it do not trade it could get 5 bushels of rye for each pound of cheese while with this trade it get only 1 bushels of rye so Italy will not trade at this price.
- similarly at 2 bushels of rye for each pound of cheese, Italy will not trade.
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