5. The price of trade Suppose that Portugal and Denmark both produce rye and sho
ID: 1132694 • Letter: 5
Question
5. The price of trade Suppose that Portugal and Denmark both produce rye and shoes. Portugal's opportunity cost of producing a pair of shoes is 4 bushels of rye while Denmark's opportunity cost of producing a pair of shoes is 10 bushels of rye. By comparing the opportunity cost of producing shoes in the two countries, you can tell that production of shoes and has a comparative advantage in the has a comparative advantage in the production of rye Suppose that Portugal and Denmark consider trading shoes and rye with each other. Portugal can gain from specialization and trade as long as it receives more than receives more than of rye for each pair of shoes it exports to Denmark. Similarly, Denmark can gain from trade as long as it of shoes for each bushel of rye it exports to Portugal. - Based on your answer to the last question, which of the foilowing prices of trade (that is, price of shoes in terms of rye) would allow both Denmark and Portugal to gain from trade? Check all that apply 7 bushels of rye per pair of shoes 1 bushel of rye per pair of shoes 9 bushels of rye per pair of shoes 2 bushels of rye per pair of shoesExplanation / Answer
The opportunity cost of producing a pair of shoes is 4 bushles of rye for Portugal while the opportunity cost of producing a pair of shoes is 10 bushels of rye for Denmark.
It means that opportunity cost of production 1 pair of shoes is low for Portugal so
Portugal has a comparative advantage in the production of shoes and Denmark has a comparative advantage in the production of rye.
Portugal can gain from the specialisation and trade as long as it receives more than 4 bushles of rye for each pair of shoes.... Denmark can gain from trade as long as it receives more than 1/10 of shoes for each bushles of rye it export to Portugal.
Explanation :
As the opportunity cost of producing 1 pair of shoes is 4 bushles of rye for Portugal so it will gain from trade when it get more than 4 bushles of rye for each pair of shoes.
The opportunity cost of producing 1 pair of shoes is 10 bushles of rye so the opportunity cost of producing 1 bushles of rye will be 1/10 of shoes that's why Denmark will gain from trade when it get more than 1/10 of shoes for each bushels of rye.
Price of shoes in terms of rye at which both Portugal and Denmark gain from trade is in the range of 4 to 10.
It means if the price is of per pair shoes is less than 4 bushles of rye Portugal will not gain from trade as it could produce 4 bushles of rye by itself for 1 pair of shoes.
While if the price of shoes is more than 10 bushles of rye Denmark will not gain from trade as it could produce a pair of shoes at the cost of 10 bushles of rye by itself so it will not give more than 10 bushels of rye in exchange of 1 pair of shoes.
According to this check that all apply;
7 bushles of rye per pair of shoes
9 bushles of rye per pair of shoes.
Not check :
1 bushles of rye
2 bushels of rye
As Portugal will not gain from trade at these 2 prices.
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