Question

Suppose that Greece and Switzerland both produce oil and olives. Greece's opportunity cost of producing a crate of olives is 5 barrels of oil while Switzerland's opportunity cost of producing a crate of olives is 10 barrels of oil.
By comparing the opportunity cost of producing olives in the two countries, you can tell that _______ has a comparative advantage in the production of olives and ________ has a comparative advantage in the production of oil.
Suppose that Greece and Switzerland consider trading olives and oil with each other. Greece can gain from specialization and trade as long as it receives more than ________ of oil for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than ________ of olives for each barrel of oil it exports to Greece. Based on your answers to the previous question, which of the following terms of trade (that is, price of olives in terms of oil) would allow both Switzerland and Greece to gain from trade?
a. 2 barrels of oil per crate of olives
b. 12 barrels of oil per crate of olives
c. 9 barrels of oil per crate of olives
d. 1 barrel of oil per crate of olives

Answer 1

Answer:

1) Greece

2) Switzerland

3) 5 barrels of oil

3) 1/10 crates of olive

4) B. 12 barrels of oil per crate.

Explanation:

A) Greece forgoes a lesser amount of oil barrels to make the same amount of olive as Switzerland, so it has a comparative advantage in making olive.

B) Switzerland will save more oil if it doesn't produce olives than Greece would save, so it has a comparative advantage in producing barrels of oil.

C) since Greece produces one crate of olive with 5 barrels of oil, it will only gain in any trade trading more than 5 barrels of oil for every crates of olive.

D) since Switzerland produces 1 crate of olive with 10 barrels of oil, it will only gain in a trade trading 1/10 crates of olive for one barrel of oil.

E) only option B will satisfy both countries.