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Homework answers / question archive / Suppose that Greece and Austria both produce beer and wine
Suppose that Greece and Austria both produce beer and wine. Greece's opportunity cost of producing a bottle of wine is 5 barrels of beer while Austria's opportunity cost of producing a bottle of wine is 10 barrels of beer. By comparing the opportunity cost of producing win the two countries, you can tell that ? has a comparative advantage in the production of wine and ? has a comparative advantage in the production of beer. Suppose that Greece and Austria consider trading wine and beer with each other. Greece can gain from specialization and trade as long as it receives more than ? of beer for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than ? of wine for each barrel of beer it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of wine in terms of beer) would allow both Austria and Greece to gain from trade?
a. 7 barrels of beer per bottle of wine
b. 1 barrels of beer per bottle of wine
c. 6 barrels of beer per bottle of wine
d. 11 barrels of beer per bottle of wine
Greece has a lower opportunity cost in producing wine than Austria so Greece has a comparative advantage in wine and Austria has a comparative advantage in beer. Greece can gain from trade and specialization as long as it receives more than 5 barrels of beer for each bottle of wine it exports to Austria. Austria can gain from trade and specialization as long as it receives more than 1/10 bottles of wine for each barrel of beer it exports to Greece. Austria and Greece both gain from trade as long as the price of trade was 11 barrels of beer per bottle of wine.
