Question

Country Olivencia Gardenia Labor hours need to make one ton Spaghetti Lasagna 2 3 3 1 Using the table above, assume both countries have 1000 labor hours each. How many of each good can Gardenia produce if production focused on one good? 2000 units of spaghetti and 3000 units of lasagna O 333 units of spaghetti and 1000 units of lasagna O 3000 units of spaghetti and 1000 units of lasagna O 1000 units of spaghetti and 333 units of lasagna

Answer 1

Answer 39:

	Labor hours needed to make 1 ton
Country	Spaghetti	Opportunity cost	Lasagna	Opportunity cost
Olivencia	2	2/3=0.67 Lasagna	3	3/2=1.5 Spaghetti
Gardenia	3	3/1=3 Lasagna	1	1/3=0.33 Spaghetti

Opportunity cost of producing Spaghetti is less in Olivencia. So, Olivencia will specialise in production of Spaghetti. Olivencia will be able to produce 1.5 (1/0.67) Spaghetti by sacrificing 1 Lasagna.

Opportunity cost of producing Lasagna is less in Gardenia. So, Gardenia will specialise in production of Lasagna. Gardenia will be able to produce 3 (1/0.33) Lasagna by sacrificing 1 Spaghetti.

If Olivencia will export 200 units of its comparative advantage(Spaghetti), then Gardenia will export 200 units of Lasagna.

Trade will not be possible at less than 200/1.5 or 133.33 Lasagna because Olivencia sacrificed 133.33 Lasagna to produce 200 Spaghetti.

Answer 40:

For Olivencia, gains from trade after specialisation and trade with Gardenia is 67 units of Lasagna.

Olivencia sacrificed 133 (approx.) units of Lasagna for producing 200 units of Spaghetti and exported 200 uits of Spaghetti for 200 units of Lasagna. So, instead of producing 133 units of lasagna Olivencia produced its comparative advantage(Spaghetti) and exported 200 Spaghetti in exchange of 200 Lasagna. So, Olivencia get 67 (200-133) Lasagna extra and that is Olivencia's gain from trade.