Question

Suppose that France and Austria both produce jeans and wine. France's opportunity cost of producing a...

Suppose that France and Austria both produce jeans and wine. France's opportunity cost of producing a bottle of wine is 3 pairs of jeans while Austria's opportunity cost of producing a bottle of wine is 11 pairs of jeans. By comparing the opportunity cost of producing wine in 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 jeans. Suppose that France and Austria consider trading wine and jeans with each other. France can gain from specialization and trade as long as it receives more than of jeans 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 pair of jeans it exports to France. Based on your answer to the last question, which of the following prices of trade (that is, price of wine in terms of jeans) would allow both Austria and France to gain from trade? Check all that apply. 2 pairs of jeans per bottle of wine 4 pairs of jeans per bottle of wine 1 pair of jeans per bottle of wine 6 pairs of jeans per bottle of wine

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Answer #1

By comparing the opportunity cost of producing wine in the two countries, you can tell that France has a comparative advantage in the production of wine (lower opportunity cost in terms of pairs of jeans) and Austria has a comparative advantage in the production of jeans.

France can gain from specialization and trade as long as it receives more than 3 pairs of jeans for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than 1/11 bottle of wine for each pair of jeans it exports to France.

Correct options:

- 4 pairs of jeans per bottle of wine

- 6 pairs of jeans per bottle of wine

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