Dolorium\'s opportunity cost of producing 1 pair of jeans is (1/2 bushel / 1/4 b

ID: 1167149 • Letter: D

Question

Dolorium's opportunity cost of producing 1 pair of jeans is (1/2 bushel / 1/4 bushel / 2 bushels/ 4 bushels) of corn, and Contente's opportunity cost of producing 1 pair of jeans is (1/2 bushel / 1/4 bushel / 2 bushels/ 4 bushels) of corn. Therefore, (Contente/Dolorium) has a comparative advantage in the production of jeans, and (Contente/Dolorium) has a comparative advantage in the production of corn.

Trade Action options for Jeans - Exports 14 or Imports 14

Trade Action options for Corn - Exports 42 or Imports 42

Consider two neighboring island countries called Dolorium and Contente. They each have 4 million labor hours available per week 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 Jeans (Pairs per hour of labor) 4 Corn Country Dolorium Contente (Bushels per hour of labor) 12 Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce corn, while Dolorium uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce corn. Consequently, Dolorium produces 12 million pairs of jeans and 16 million bushels of corn, and Contente produces 6 million pairs of jeans and 36 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 Dolorium's opportunity cost of producing 1 pair of jeans is of corn, and Contente's opportunity cost of producing 1 pair of jeans is of corn. Therefore, advantage in the production of corn. has a comparative advantage in the production of jeans, and has a comparative 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 million pairs per week, and the country that produces corn will produce million bushels 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 jeans trades 14 million pairs of jeans to the other country in exchange for 42 million bushels of corn. 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 jeans was 18 million pairs per week, and the total production of corn was 52 million bushels per week. Because of specialization, the total production of jeans has increased by corn has increased by million pairs per week, and the total production of million bushels per week.

Explanation / Answer

Output table when both countries use 4 million hours for producing each good is shown below.

Jeans (Million)

Corn (Million)

Dolorium

4 x 4 = 16

16 x 4 = 64

Contente

6 x 4 = 24

12 x 4 = 48

(a) Opportunity cost (OC) computed as follows.

In Dolorium, OC of jeans = 64/16 = 4 corn

In Contente, OC of jeans = 48/24 = 2 corn

(b) Therefore, Contente has comparative advantage in jeans (Since Contente can produce jeans at a lower OC than Dolorium can: 2 < 4). Accordingly, Dolorium has comparative advantage in corn.

(c)

Country making jeans (Contente) will produce 24 million jeans.

Country making corn (Dolorium) will produce 64 million corn.

(d) Because of specialization,

Production of jeans has increased by 6 million (= 24 million - 18 million). Production of corn has increased by 12 million (= 64 million - 52 million).

(e) Dolorium trades (exports) 42 million corn in exchange of (imports) 14 million jeans. Contente trades (exports) 14 million jeans in exchange of (imports) 42 million corn.

DOLORIUM

CONTENTE

Jeans

Corn

WITHOUT TRADE:

Prod. & Consumption

WITH TRADE

Production

Trade Action:

Import:

Export:

Import:

14 jeans

42 corn

14 jeans

42 corn

Consumption

GAIN FROM TRADE

Increase in Consumption