Question

3. Gains from trade 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 jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor. Country Bellissima Dolorium Jeans (Pairs per hour of labor) 12 Corn (Bushels per hour of labor) 24 Initially, suppose Bellissima uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Dolorium uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Bellissima produces 12 million pairs of jeans and 72 million bushels of corn, and Dolorium produces 24 million pairs of jeans and 32 million bushels of corn. 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 corn it produces Bellissima's opportunity cost of producing 1 pair of jeans is_2 bushelsof corn, and Dolorium's opportunity cost of producing 1 pair of jeans is 4 bushelsof corn. Therefore, Bellissimahas a comparative advantage in the production of jeans, and Dolorium 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 48 million pairs per month, and the country that produces corn will produce 128 million bushels per month

Answer 1

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