Suppose that Greece and Austria both produce beer and cheese. Greece's opportunity cost of producing a pound of cheese is 4 barrels of beer while Austria's opportunity cost of producing a pound of cheese is 10 barrels of beer. By comparing the opportunity cost of producing cheese in the two countries, you can tell thathas a comparative advantage in the production of cheese andhas a comparative advantage in the production of beer.
Suppose that Greece and Austria consider trading cheese and beer with each other. Greece can gain from specialization and trade as long as it receives more thanof beer for each pound of cheese it exports to Austria. Similarly, Austria can gain from trade as long as it receives more thanof cheese for each barrel of beer it exports to Greece.
Based on this, which of the following terms of trade (that is, price of cheese in terms of beer) would allow both Austria and Greece to gain from trade?
a. 18 pounds of fish per pound of cheese.
b. 9 pounds of fish per pound of cheese.
c. 1 pound of fish per pound of cheese.
d. 3 pounds of fish per pound of cheese.

By comparing the opportunity cost of producing cheese in the two countries, you can tell that GREECE has a comparative advantage in the production of cheese and AUSTRIA has a comparative advantage in the production of beer.

Suppose that Greece and Austria consider trading cheese and beer with each other. Greece can gain from specialization and trade as long as it receives more than 4 BARRELS of beer for each pound of cheese it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than 0.1 POUND of cheese for each barrel of beer it exports to Greece.

Based on this, which of the following terms of trade (that is, price of cheese in terms of beer) would allow both Austria and Greece to gain from trade?

a. 18 pounds of fish per pound of cheese.

b. 9 pounds of fish per pound of cheese.

c. 1 pound of fish per pound of cheese.

d. 3 pounds of fish per pound of cheese.

WHAT HAPPENED TO THE BEER?

Assuming it is barrels of beer instead of fish, then both would gain if they traded 9 BARRELS OF BEER PER POUND OF CHEESE.

Explanation:

Opportunity costs are the benefits lost or extra costs associated to choosing one activity or investment over another alternative, I.e. the cost of the next best choice.

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