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QUESTION:

The price of trade

Suppose that Ireland and Luxembourg both produce boots and glass. Ireland's opportunity cost of producing a pane of glass is 6 pairs of boots while Luxembourg's opportunity cost of producing a pane of glass is 11 pairs of boots.
By comparing the opportunity cost of producing glass in the two countries, you can tell that    has a comparative advantage in the production of glass and    has a comparative advantage in the production of boots.
Suppose that Ireland and Luxembourg consider trading glass and boots with each other. Ireland can gain from specialization and trade as long as it receives more than    of boots for each pane of glass it exports to Luxembourg. Similarly, Luxembourg can gain from trade as long as it receives more than    of glass for each pair of boots it exports to Ireland.
Based on your answer to the last question, which of the following prices of trade (that is, price of glass in terms of boots) would allow both Luxembourg and Ireland to gain from trade? Check all that apply.

ANSWER:

By comparing the opportunity cost of producing glass in the two countries, you can tell thatIreland  Correct has a comparative advantage in the production of glass andLuxembourg  Correct has a comparative advantage in the production of boots.
Points:
1 / 1
Close Explanation
Explanation:
Ireland has a lower opportunity cost for the production of glass than Luxembourg does; therefore, Ireland has a comparative advantage in the production of glass. That is, Ireland has to give up only 6 pairs of boots to produce a pane of glass while Luxembourg must give up 11 pairs of boots to produce a pane of glass. Another way to think of it is that it is cheaper for Ireland to produce glass than it is for Luxembourg. Therefore, it is better for Ireland to specialize in the production of glass.
You can determine the opportunity cost of boots in terms of glass from the opportunity cost of glass in terms of boots. For example, Ireland's opportunity cost of producing a pane of glass is 6 pairs of boots. Therefore, Ireland can produce 6 pairs of boots if it forgoes the production of 1 pane of glass. This means that Ireland's opportunity cost of producing a pair of boots is 1/6 of a pane of glass. Similarly, Luxembourg's opportunity cost of producing a pane of glass is 11 pairs of boots, so Luxembourg's opportunity cost of producing a pair of boots is 1/11 of a pane of glass. Since Luxembourg has a lower opportunity cost for the production of boots than Ireland does, it has a comparative advantage in the production of boots.
Suppose that Ireland and Luxembourg consider trading glass and boots with each other. Ireland can gain from specialization and trade as long as it receives more than6 pairs  Correct of boots for each pane of glass it exports to Luxembourg. Similarly, Luxembourg can gain from trade as long as it receives more than1/11 pane  Correct of glass for each pair of boots it exports to Ireland.
Points:
1 / 1
Close Explanation
Explanation:
Ireland's opportunity cost of producing a pane of glass is 6 pairs of boots. Therefore, if it can import more than 6 pairs of boots for each pane of glass it exports, it will be better off importing boots than producing it domestically.
Luxembourg's opportunity cost of producing a pane of glass is 11 pairs of boots. Another way of thinking about this is that for each pair of boots it produces, it must give up 1/11 of a pane of glass. Therefore, if it can import more than 1/11 of a pane of glass for each pair of boots it exports, it will be better off importing glass than producing glass domestically.
Based on your answer to the last question, which of the following prices of trade (that is, price of glass in terms of boots) would allow both Luxembourg and Ireland to gain from trade? Check all that apply.
Correct
Correct
Correct
Correct
Points:
1 / 1
Close Explanation
Explanation:
Recall that Ireland will gain from trade if it gets more than 6 pairs of boots for each pane of glass it exports. Similarly, Luxembourg will trade boots only if it gets more than 1/11 pane of glass for each pair of boots it exports. Another way of saying this is that Luxembourg is willing to trade up to 11 pairs of boots for each pane of glass it imports.
Therefore, any price ratio that involves glass selling for between 6 and 11 pairs of boots per pane of glass will benefit both countries. Any price below 6 pairs of boots per pane of glass would benefit Luxembourg but not Ireland; similarly, any price above 11 pairs of boots per pane of glass would benefit Ireland but not Luxembourg.

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