The U.S. can produce pizza for $7.50 each and barrels of beer for $37.50 each, and Germany can produce pizza for €5 each and barrels of beer for €15 each (€ is the symbol for the euro, the currency Germany uses). If the exchange rate is 1.50 $/€ then

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To determine comparative advantage, we need to calculate the opportunity costs of producing each good in each country. The opportunity cost of producing pizza in the U.S. is 5/30 barrels of beer (7.50/37.50) while the opportunity cost of producing pizza in Germany is 1/3 barrels of beer (5/15). Therefore, Germany has a comparative advantage in pizza production as it has a lower opportunity cost. The same comparison can be made for beer production, where the opportunity cost in the U.S. is 2 pizzas (7.50/5) and the opportunity cost in Germany is 1 pizza (15/5). Therefore, the U.S. has a comparative advantage in beer production as it has a lower opportunity cost.

The US Can Produce Pizza for $7