Question

Suppose that Portugal and Denmark both produce jeans and wine. Portugal's opportunity cost of producing a bottle of wine is 4 pairs of jeans while Denmark's opportunity cost of producing a bottle of wine is 10 pairs of jeans.By comparing the opportunity cost of producing wine in the two countries, you can tell that ______________ (Portugal, Denmark) has a comparative advantage in the production of wine and ___________ (Portugal, Denmark) has a comparative advantage in the production of jeans.Suppose that Portugal and Denmark consider trading wine and jeans with each other. Portugal can gain from specialization and trade as long as it receives more than ___________ (1 pair, 1/10 pair, 1/4 pair, 4 pairs, 10 pairs) of jeans for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than ____________ (1 bottle, 1/10 bottle, 1/4 bottle, 4 bottles, 10 bottles) of wine for each pair of jeans it exports to Portugal.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 Denmark and Portugal to gain from trade? Check all that apply.-- 1 pair of jeans per bottle of wine-- 2 pairs of jeans per bottle of wine-- 8 pairs of jeans per bottle of wine-- 18 pairs of jeans per bottle of wine

Answer 1

Answer:

Portugal has a comparative advantage in producing wine.

Denmark has a comparative advantage in producing jeans.

Portugal can gain from specialization and trade as long as it receives more than 4 pairs of jeans.

Denmark can gain from trade as long as it receives more than 1/4 bottles of wine.

The trade price will be 8 pairs of jeans per bottle of wine.

Explanation:

Portugal and Denmark both produce jeans and wine.

Portugal's opportunity cost of producing a bottle of wine

= 4 pairs of jeans

Denmark's opportunity cost of producing a bottle of wine

= 10 pairs of jeans

Portugal has a lower opportunity in producing wine so it has a comparative advantage in producing wine.

Portugal's opportunity cost of producing a pair of jeans

= $\frac{1}{4}$

= 0.25

Denmark's opportunity cost of producing a pair of jeans

= $\frac{1}{10}$

= 0.1

Denmark has a lower opportunity in producing jeans so it has a comparative advantage in producing jeans.

Portugal can gain from trade as long as it receives more than 4 pairs of jeans for each bottle of wine. While Denmark can gain from trade as long as it receives more than 1/4 bottle of wine for each pair of jeans.

Both the countries will gain from trade if the trade price lies between the opportunity cost of both countries. Here the trade price will be 8 pairs of jeans per bottle of wine.