Question

Consider two neighboring island countries called Bellissima and Dolorium. They each have 4 million labor hours available per week that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor.
Jeans Rye

(Pairs per hour of labor) (Bushels per hour of labor)

Bellissima 8 16
Dolorium 5 20

Initially, suppose Bellissima uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Dolorium uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Bellissima produces 8 million pairs of jeans and 48 million bushels of rye, and Dolorium produces 15 million pairs of jeans and 20 million bushels of rye. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of jeans and rye it produces.

Felicidad's opportunity cost of producing 1 pair of jeans is (1/2 bushel, 1/4 bushel, 2 bushel, 4 bushel) of corn, and Bellissima's opportunity cost of producing 1 pair of jeans is (1/2 bushel, 1/4 bushel, 2 bushel, 4 bushel) of corn. Therefore, (Bellissima, Felicidad) has a comparative advantage in the production of jeans, and (Bellissima, Felicidad) has a comparative advantage in the production of corn.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce _____ million pairs per month, and the country that produces corn will produce _____ million bushels per month.

Answer 1

Answer:

Bellisima's opportunity cost:  

• Production of corn per million hours of labor = 8 / 16 = 0.5 pairs of jeans
• Production of jeans per million hours of labor = 16 / 8 = 2 bushels of rye

Dolorium's opportunity cost:  

• Production of corn per million hours of labor = 5 / 20 = 0.25 pairs of jeans
• Production of jeans per million hours of labor = 20 / 5 = 4 bushels of rye

Dolorium has a comparative advantage int he production of rye while Bellisima has a comparative advantage in the production of jeans.

If both countries specialize:

• Dolorium will produce 80 million bushels of rye.
• Bellisima will produce 32 million pairs of jeans.

Total production of rye has increased by 12 million bushels.

Total production of jeans has increased by 9 million pairs.