Question

Consider two neighboring island countries called Bellissima and Felicidad. They each have 4 million labor hours available per month that they can use to produce corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor. Corn (Bushels per hour of labor) Jeans (Pairs per hour of labor) Country Bellissima Felicidad Initially, suppose Bellissima uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of corn and 48 million pairs of jeans, and Felicidad produces 15 million bushels of corn 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 corn and jeans it produces. Bellissima's opportunity cost of producing 1 bushel of corn is of jeans, and Felicidad's opportunity cost of producing 1 bushel of corn of jeans. Therefore, has a comparative advantage in the production of corn, 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 corn will produce million bushels per month, and the country that produces jeans will million pairs per month.

Answer 1

Blanks-

1) 16/8 = 2

2) 20/5 = 4

3) Bellissima

4) Felicidad

5) 8*4 = 32

6) 20*4 = 80

7) 32-23 = 9

8) 80-68 = 12

	Bellissima		Felicidad
	Corn	Jeans	Corn	Jeans
Without Trade
Production	8	48	15	20
Consumption	8	48	15	20
With Trade
Production	32	0	0	80
Trade action	Export 18	Import 54	Import 18	Export 54
Consumption	14	54	18	26
Gains from Trade
Increase in Consumption	6	6	3	6