Question

Suppose that Portugal and Sweden both produce fish and olives. Portugal's opportunity cost of producing a crate of olives is 3 pounds of fish while Sweden's opportunity cost of producing a crate of olives is 9 pounds of fish.

By comparing the opportunity cost of producing olives in the two countries, you can tell that ( portugal/ Sweden) has a comparative advantage in the production of olives and ( Portugal/ Sweden) has a comparative advantage in the production of fish.

Suppose that Portugal and Sweden consider trading olives and fish with each other. Portugal can gain from specialization and trade as long as it receives more than( 1 pound/ 1/3 pound / 1/9 pound / 3 pounds/ 9 pounds) of fish for each crate of olives it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than ( 1 crate/ 1/3 crate/ 1/9 crate/ 3 crates/ 9 crates) of olives for each pound of fish it exports to Portugal.

Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of fish) would allow both Sweden and Portugal to gain from trade? Check all that apply.

8 pounds of fish per crate of olives

17 pounds of fish per crate of olives

1 pound of fish per crate of olives

4 pounds of fish per crate of olives

Answer 1

a) As the opportunity cost of producing crates of olive is less in Portugal they will produce olives as they have a comparative advantage in that and Sweden will produce fish as they have a comparative advantage in the production of fish.

b) Portugal will gain as long as they are receiving more than 3 pounds of fish for each crate of olive. and Sweden will benefit if they receive more than 1/9 of olives for each pound of fish.

The price should be more than 3 and less than 9 for a crate of olives.

The answer is "A" and "D".