Question

Homework (Ch 03) Consider two neighboring island countries called Bellissima and Dolorium. They each have 4 million labor hours available per month that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor. Jeans Rye (Bushels per hour of labor) (Pairs per hour of labor) Country 16 Bellissima 20 Dolorium Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Dolorium uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of rye and 48 million pairs of jeans, and Dolorium produces 15 million bushels of rye and 20 million pairs of jeans. 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 rye and jeans it produces. Bellissima's opportunity cost of producing 1 bushel of rye is of jeans. Therefore, of jeans, and Dolorium's opportunity cost of producing 1 bushel of rye is has a comparative advantage in the production of rye, and has a comparative advantage in the production of jeans. 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 rye will produce | million pairs per month million bushels per month, and the country that produces jeans will produce In the following table, enter each country's production decision on the third row of the table (marked "Production"). Suppose the country that produces rye trades 18 milion bushels of rye to the other country in exchange for 54 million pairs of jeans. In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action, " and enter each country's final consumption of each good on the line marked "Consumption.

Answer 1

Comparative Advantage

1. Bellissima’s opportunity cost of producing one bushel of rye is 2 pairs of jeans (16/8).
2. Dolorium’ s opportunity cost of producing one bushel of rye is 4 pairs of jeans (20/5).
3. Bellissima’s opportunity cost of producing one pair of jeans is 0.5 bushel of rye (8/16).
4. Dolorium’s opportunity cost of producing one pair of jeans is 0.25 bushel of rye ( 5/20).

Bellissima has a comparative advantage in producing rye as the opportunity cost is lower .      

Dolorium has a comparative advantage in producing jeans as the opportunity cost is lower.

If Bellissima produces rye, in which it has comparative advantage, it will produce (4 million labor hours x 8) 32 million pounds of rye.

If Dolorium produces jeans, in which it has comparative advantage, it will produce (4 million labor hours x 20) 80 million pairs of jeans.

	Bellissma		Dolorium
	Rye	Jeans	Rye	Jeans
	Milions of bushels	Millions of pairs	Milions of bushels	Millions of pairs
Without trade
Production	8	48	15	20
Consumption	8	48	15	20
With trade
Production
Trade Action	32	0	0	80
Consumption	14	54	18	26
Gains from trade
Increase in consumption	6	6	3	6