Suppose that Greece and Sweden both produce oil and cheese G

Suppose that Greece and Sweden both produce oil and cheese. Greece\'s opportunity cost of producing a pound of cheese is 5 barrels of oil while Sweden\'s opportunity cost of producing a pound of cheese is 10 barrels of oil. By comparing the opportunity cost of producing cheese in the two countries, you can tell that production of cheese andhas a comparative advantage in the production of oil. has a comparative advantage in the -- Suppose that Greece and Sweden consider trading cheese and oil with each other. Greece can gain from specialization and trade as long as it receives more than than of oil for each pound of cheese it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more of cheese for eachparrel of oil it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of oil) would allow both Sweden and Greece to gain from trade? Check all that apply. 12 barrels of oil per pound of cheese 2 barrels of oil per pound of cheese 6 barrels of oil per pound of cheese 9 barrels of oil per pound of cheese

Solution

a) By looking at the opportunity cost we can tell that Greece has a comparative advantage in the production of cheese and Sweden has a comparative advantage in the production of oil. (a nation with a higher opportunity cost will produce that good here, Greece can give up 5 barrel of oil but Sweden will not give up ten barrels it is a higher opportunity cost.)

b) 5 barrel (from Sweden) and 0.1 pounds of cheese (from Greece).

c) The price should be more than 5 barrel and less than 10 barrel. The answer is C and D.