6 February 2012, 2:45 pm
Suppose that Spain and Denmark both produce oil and stained glass. Spain's opportunity cost of producing a pane of stained glass is 5 barrels of oil, while Denmark's opportunity cost of producing a pane of stained glass is 8 barrels of oil. By comparing the opportunity cost of producing stained glass in the two countries, you can tell that (Spain/Denmark) has a comparative advantage in the production of stained glass and (Spain/Denmark) has a comparative advantage in the production of oil. Suppose that Spain and Denmark considering trading stained glass and oil with each other. Spain can gain from specialization and trade as long as it receives more that _____ barrels of oil for each pane of stained glass it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than _____ pane of stained glass for each barrel of oil it exports to Spain. Based on the answers to the question above, which of the follows terms of trade (that is, price of stained glass in terms of oil) would allow both Denmark and Spain to gain from trade? There can be more than one answer. a. 1 barrel of oil per pane of stained glass b. 9 barrels of oil per pane of stained glass c. 4 barrels of oil per pane of stained glass. d. 7 barrels of oil per pane of stained glass. I believe the first 4 are Spain, Denmark, 5 barrels, and 1/8 pane, but not sure, and I have no clue about the last part. Please HELP :) Thank You... Read More »
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