Question

Consider two neighboring island countries called Arcadia and Felicidad. They each have 4 million labor hours available per week that they can use to produce com, Jeans, or a combination of both. The following table shows the amount of com or jeans that can be produced using 1 hour of labor. Initially, suppose Arcadia uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce Jeans while Felicidad uses 3 million hours of labor per week to produce com and 1 million hours per week to produce jeans. Consequently, Arcadia produces 8 million bushels of corn and 48 million pairs of Jeans, and Felicidad produces 15 million bushels of com 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 com and jeans it produces. Arcadia's opportunity cost of producing 1 bushel of corn of Jeans, and Felicidad's opportunity cost of producing 1 bushel of corn Is of jeans. Therefore, has a comparative advantage in the production of com, 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 com will produce million bushels per week, and the country that produces Jeans will produce million pairs per week. In the following table, enter each country's production decision on the third row of the table (marked 'Production'). Suppose the country that produces com trades 18 million bushels of com 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.' When the two countries did not specialize, the total production of corn was 23 million bushels per week, and the total production of jeans was 68 million pairs per week. Because of specialization, the total production of com has increased by million bushels per week, and the total production of Jeans has increased by million pairs per week. Because the two country produce more com and more jeans under specialization, each country is able to gain from trade. Calculate the gains from trade-that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in consumption').

Answer 1

Arcadia?s opportunity cost of producing 1 bushel of corn is = 16/8 = 2 pairs of jeans

Felicidad?s opportunity cost of producing 1 bushel of corn is = 20/5 = 4 pairs of jeans

Thus, Arcadia has a comparative advantage in the production of corn, and Felicidad in the production of jeans

Arcadia will use 1+3 = 4 million hours of labor per week to produce corn

Thus, production of corn in Arcadia = 8 * 4 = 32 million bushels per week

Felicidad will use 1+3 = 4 million hours per week to produce jeans

Thus, production of jeans in Felicidad = 20*4 = 80 million pairs per week

Because of specialization, the total production of corn has increased by 32-23 = 9 million

And production of jeans has increased by 80-68 = 12 million pairs

		Arcadia			Felicidad
		Corn	Jeans		Corn	Jeans
Without trade
	Production	8	48		15	20
	Consumption	8	48		15	20
With trade
	Prodcution	32	0		0	80
	Trade Action	-18	54		18	-54
	Consumption	14	54		18	26
Gains from Trade
	Increase in consumption	6	6		3	6