Answered: Suppose there exist two imaginary…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose there exist two imaginary countries, Everglades and Denali. Their labor forces are each capable of supplying four million hours per day that can be used to produce shorts, almonds, or some combination of the two. The following table shows the amount of shorts or almonds that can be produced by one hour of labor.

Country	Shorts	Almonds
(Pairs per hour of labor)	(Pounds per hour of labor)
Everglades	4	16
Denali	6	12

Suppose that initially Denali uses 1 million hours of labor per day to produce shorts and 3 million hours per day to produce almonds, while Everglades uses 3 million hours of labor per day to produce shorts and 1 million hours per day to produce almonds. As a result, Everglades produces 12 million pairs of shorts and 16 million pounds of almonds, and Denali produces 6 million pairs of shorts and 36 million pounds of almonds. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of shorts and almonds it produces.

Everglades's opportunity cost of producing 1 pair of shorts is1/4 pound of almonds, and Denali's opportunity cost of producing 1 pair of shorts is1/2 pound of almonds. Therefore,Everglades has a comparative advantage in the production of shorts, andDenali has a comparative advantage in the production of almonds.

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 shorts will produce

million pairs per day, and the country that produces almonds will produce

million pounds per day.

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

Suppose the country that produces shorts trades 14 million pairs of shorts to the other country in exchange for 42 million pounds of almonds.

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 shorts was 18 million pairs per day, and the total production of almonds was 52 million pounds per day. Because of specialization, the total production of shorts has increased by

million pairs per day, and the total production of almonds has increased by

million pounds per day.

Because the two countries produce more shorts and more almonds 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”).

	Everglades	Denali
Shorts	Almonds	Shorts	Almonds
(Millions of pairs)	(Millions of pounds)	(Millions of pairs)	(Millions of pounds)
Without Trade
Production	12	16	6	36
Consumption	12	16	6	36
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

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Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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The price of ignoring the next best alternative is referred to as the opportunity cost. The opportunity cost of good X is defined as the variation in production between good Y and good X.

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