Answered: Consider two neighboring island…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider two neighboring island countries called Dolorium and Bellissima. They each have 4 million labor hours available per month that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor.

Country	Rye (Bushels per hour of labor)	Jeans (Pairs per hour of labor)
Dolorium	8	32
Bellissima	12	24

Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Dolorium uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Dolorium produces 24 million bushels of rye and 32 million pairs of jeans, and Bellissima produces 12 million bushels of rye and 72 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 rye and jeans it produces.

Dolorium's opportunity cost of producing 1 bushel of rye is ____ of jeans, and Bellissima's opportunity cost of producing 1 bushel of rye is ____ of jeans. Therefore, ____ (Dolorium or Bellissima) has a comparative advantage in the production of rye, and _____ (Dolorium and Bellisima) 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 rye will produce ____ million bushels per month, and the country that produces jeans will produce ____ million pairs per month.

In the following table, enter each country's production decision on the third row of the table (marked “Production”).

Suppose the country that produces rye trades 26 million bushels of rye to the other country in exchange for 78 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 rye was 36 million bushels per month, and the total production of jeans was 104 million pairs per month. Because of specialization, the total production of rye has increased by ____ million bushels per month, and the total production of jeans has increased by ____ million pairs per month.

Because the two countries produce more rye 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”).

Table in photo

Because the two countries produce more rye 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").
Without Trade
Production
Consumption
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption
Dolorium
24
24
Rye
Jeans
Rye
Jeans
(Millions of bushels) (Millions of pairs) (Millions of bushels) (Millions of pairs)
32
32
12
12
Bellissima
000
72
72

Consider two neighboring Island countries called Dolorlum and Bellissima. They each have 4 million labor hours available per month that they can use
to produce rye, jeans, or a combination of both. The following table shows the amount of rye or Jeans that can be produced using 1 hour of labor.
Country
Dolorium
Bellissima
Rye
(Bushels per hour of labor)
8
12
Jeans
(Pairs per hour of labor)
32
24
Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce Jeans, while Dolorlum
uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Dolorlum produces 24 million
bushels of rye and 32 million pairs of jeans, and Bellissima produces 12 million bushels of rye and 72 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 rye and jeans it
produces.
Dolorium's opportunity cost of producing 1 bushel of rye is
jeans. Therefore,
of
advantage in the production of jeans.
of Jeans, and Bellissima's opportunity cost of producing 1 bushel of rye is
has a comparative advantage in the production of rye, 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 rye will produce million bushels per month, and the country that produces jeans will produce
million pairs per month.
In the following table, enter each country's production decision on the third row of the table (marked "Production").
Suppose the country that produces rye trades 26 million bushels of rye to the other country in exchange for 78 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 rye was 36 million bushels per month, and the total production of Jeans was 104
million pairs per month. Because of specialization, the total production of rye has increased by million bushels per month, and the total
production of Jeans has increased by
million pairs per month.

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