Chapter $03$ Homework

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$5.$ The price of trade

Suppose that Slovenia and Liechtenstein both produce ale and broccoli. Slovenia's opportunity cost of producing a bushel of broccoli is $4$ kegs of ale while Liechtenstein's opportunity cost of producing a bushel of broccoli is $12$ kegs of ale.

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

Suppose that Slovenia and Liechtenstein consider trading broccoli and ale with each other. Slovenia can gain from specialization and trade as long as it receives more than of ale for each bushel of broccoli it exports to Liechtenstein. Similarly, Liechtenstein can gain from trade as long as it receives more than $\_-$ of broccoli for each keg of ale it exports to Slovenia.

Based on your answer to the last question, which of the following prices of trade $($that is$,$ price of broccoli in terms of ale$)$ would allow both Liechtenstein and Slovenia to gain from trade? Check all that apply.

$5$ kegs of ale per bushel of broccoli

$7$ kegs of ale per bushel of broccoli

$16$ kegs of ale per bushel of broccoli

$2$ kegs of ale per bushel of broccoli