Suppose that Spain and Switzerland both produce rye and olives. Spain's opportunity cost of producing a crate of olives is 5 bushels of rye while Switzerland's opportunity cost of producing a crate of olives is 10 bushels of rye.

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

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

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

a) 1 bushel of rye per crate of olives

b) 7 bushels of rye per crate of olives

c) 11 bushels of rye per crate of olives

d) 6 bushels of rye per crate of olives

SPAIN has a comparative advantage in the production of olive while SWITZERLAND has a comparative advantage in the production of rye.

Spain can gain from specialization and trade as long as it receives more than 5 rye for each crate of olives it exports to Switzerland.

Similarly, Switzerland can gain from trade as long as it receives more than o.1 crates of olives for each bushel of rye it exports to Spain.

Both switzerland and spain will gain from trade at 11 bushels of rye per crate of olive.

Explanation: this is because olive production is advantagious in spain at a rate of 5 rye per crate of olive while rye production is adventurous in switzerland at a rate of 10 rye per crate of olive.

Spain can gain from specialization and trade as long as it receives more than 5 rye for each crate of olives it exports to Switzerland.

Similarly, Switzerland can gain from trade as long as it receives more than o.1 crates of olives for each bushel of rye it export to Spain. This is because the cost price of a crate of olive production in spain is 5 bushels of rye therefore any amount greater than 5 bushels of rye will be profit for olive production in spain, while switzerland can gain more than 0.1 crate of olive per rye it export to spain because 1/10 equals 0.1 which is the cost of olive crate per rye it export Spain.

And finally both countries will gain at 11 bushels of rye per crate of olive because the actual cost is 5 and 10 bushels of rye in Spain and switzerland therefore they will be no loss on both side.

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