Question

Suppose that Portugal and Austria both produce beer and cheese. Portugal's opportunity cost of producing a pound of cheese is 3 barrels of beer while Austria's opportunity cost of producing a pound of cheese is 11 barrels of beer.

By comparing the opportunity cost of producing cheese in the two countries, you can tell that_______has a comparative advantage in the production of cheese and _______ has a comparative advantage in the production of beer.
Suppose that Portugal and Austria consider trading cheese and beer with each other. Portugal can gain from specialization and trade as long as it receives more than_______of beer for each pound of cheese it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _______ of cheese for each barrel of beer it exports to Portugal.
Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of beer) would allow both Austria and Portugal to gain from trade?
A. 4 barrels of beer per pound of cheese
B. 6 barrels of beer per pound of cheese
C. 13 barrels of beer per pound of cheese
D. 2 barrels of beer per pound of cheese

Answer 1

Portugal and Austria

Comparative Advantage in the Production of Beer and Cheese:

1a. Portugal

b. Austria

2. a. 3 barrels and

b. 0.09 or 1/11 pounds

3. A. 4 barrels of beer per pound of cheese

Step-by-step explanation:

a) Data and Calculations:

Portugal's opportunity cost of producing a pound of cheese = 3 barrels of beer

Austria's opportunity cost of producing a pound of cheese = 11 barrels of beer

Price of trade (cheese in terms of beer) = 11/3 = 3.667 = 4

b) Portugal's comparative advantage over the production of cheese is her economy's ability to produce cheese at a lower opportunity cost than Austria. This comparative advantage gives Portugal the ability to sell cheese at a lower price than Austria and realize a more favorable balance of trade.