Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡1W in Switzerland but 1C ≡4W in Japan. At which of the following international exchange ratios (terms of trade) will Switzerland and Japan be willing to specialize and engage in trade with each other. Select one or more answers from the choices shown.

a. 1C = 3W.

b. 1C = 1/2 W.

c. 1C = 5W.

d. ½ C = 1W.

e. 2C = 1W

Option (a) and (d) are correct.

Explanation:

It is given in the question that Switzerland is having constant opportunity cost for watches and cheese, i. e, 1C = 1W and on the other hand, Japan opportunity cost ratio is 1C = 4W.

In Japan,

Opportunity cost of producing 1 cheese = 4 watches

Opportunity cost of Producing 1 watch = 0.25 cheese

From the given information, it can be seen that Switzerland is specialized and has a comparative advantage in producing cheese because opportunity cost of producing cheese is lower than that of Japan. Whereas japan has a comparative advantage in producing watches.

So, the probability of accepting for Switzerland is either more than one watch or less than or equal to 4 watches. This is because if it trades less than one watch then it creates a loss for the Switzerland and if it trades more than 4 watches then there will be a loss for the Japan.

Therefore, the following exchange ratios are consistent with the conditions:

1C = 3W and ½ C = 1W