5. The price of trade
Suppose that Croatia and Liechtenstein both produce beets and broccoli. Croatia's opportunity cost of producing a bushel of broccoli is 6 bushels of
beets while Liechtenstein's opportunity cost of producing a bushel of broccoli is 11 bushels of beets..
By comparing the opportunity cost of producing broccoli in the two countries, you can tell that
the production of broccoli and
has a comparative advantage in the production of beets.
has a comparative advantage in
Suppose that Croatia and Liechtenstein consider trading broccoli and beets with each other. Croatia can gain from specialization and trade as long as it
receives more than
of beets for each bushel of broccoli it exports to Liechtenstein. Similarly, Liechtenstein can gain from trade as
long as it receives more than
of broccoli for each bushel of beets it exports to Croatia.
Based on your answer to the last question, which of the following prices of trade (that is, price of broccoli in terms of beets) would allow both
Liechtenstein and Croatia to gain from trade? Check all that apply.
8 bushels of beets per bushel of broccoli
1 bushel of beets per bushel of broccoli
3 bushels of beets per bushel of broccoli
7 bushels of beets per bushel of broccoli
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