Suppose that Spain and Switzerland both produce rye and wine. Spain's opportunity cost of producing a bottle of wine is 4 bushels of rye, while Switzerland's opportunity cost of producing a bottle of wine is 10 bushels of rye.

 

By comparing the opportunity cost of producing wine in the two countries, you can tell that _________   has a comparative advantage in the production of wine, and ________   has a comparative advantage in the production of rye.

 

Suppose that Spain and Switzerland consider trading wine and rye with each other. Spain can gain from specialization and trade as long as it receives more than ________   of rye for each bottle of wine it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than _______    of wine for each bushel of rye it exports to Spain.

 

Based on your answers to the previous question, which of the following terms of trade (that is, price of wine in terms of rye) would allow both Switzerland and Spain to gain from trade? Check all that apply.

____8 bushels of rye per bottle of wine

_____1 bushel of rye per bottle of wine

______2 bushels of rye per bottle of wine

_______18 bushels of rye per bottle of wine

please refer in the explanation

Step-by-step explanation

Spain has a comparative advantage in the production of wine as its opportunity cost is less at 4 bushels of rye

Switzerland has a comparative advantage in the production of rye.

By comparing the opportunity cost of producing wine in the two countries, you can tell that SPAIN(Because it has to give up only 4 bushels of Rye compared to Switzerland's 10) has a comparative advantage in the production of wine and Switzerland has a comparative advantage in the production of rye(Because Spain produces 4 pounds of Rye if it gives up the production of 1 bottle of wine whereas Switzerland produces 10 pounds of Rye.So,Spain's opportunity cost of producing a pound of rye is 1/4 whereas Switzerland's opportunity cost is 1/10 for a stained glass which is lower than that of Spain's).

Suppose that Spain and Switzerland consider trading wine and rye with each other. Spain can gain from specialization and trade as long as it receives more than 4 bushel of rye for each bottle of wine it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than 1/10 (0.1) bottles of wine for each bushel of rye it exports to Spain.

Select the choices which lie between the opportunity costs of both Spain and Switzerland

8 bushel of rye per bottle of wine

(note: 1 bushel of rye per bottle of wine and 2 bushels of rye per bottle of wine are unfavorable for Spain)