Question

In one month, Mikhail's Furnishings can make 160 carpets or 160 quilts, whereas Dominique's Parlor can make 120 carpets or 200 quilts. Currently, Mikhail's is making 80 carpets and 80 quilts per month whereas Dominique's is making 60 carpets and 100 quilts. If from now on Mikhail's starts making nothing but carpets and Dominique's makes nothing but quilts, and the two shops trade 90 quilts from Dominique's for 70 carpets from Mikhail's every month, what will be the total gains from trade?

1) 20 carpets and 20 quilts
2) 15 carpets and 25 quilts
3) 10 carpets and 30 quilts
4) 30 carpets and 10 quilts

Answer 1

When Mikhail's and Dominique's specialize and trade, Mikhail's gains 20 quilts and Dominique's gains 16 carpets, representing the benefits of trade based on comparative advantage.

Step-by-step explanation:

When Mikhail's Furnishings switches to making only carpets and Dominique's Parlor to only quilts, the scenario presented in the question captures the essence of the gains from trade. Mikhail's can produce a maximum of 160 carpets or 160 quilts while Dominique's can make 120 carpets or 200 quilts. Assuming that there is a trade of 90 quilts from Dominique's for 70 carpets from Mikhail's, we have to analyze the effects of trade on both parties by examining the opportunity costs and what each party would have produced without trade.

Without the trade, Mikhail's production of 70 carpets would mean forgoing the production of 70 quilts, and Dominique's production of 90 quilts would mean forgoing the production of 54 carpets (since 120 carpets is to 200 quilts as 54 carpets is to 90 quilts when simplified).

With the trade, Mikhail's receives 90 quilts while giving up 70 carpets, which is 20 quilts more than they could have made themselves in place of those 70 carpets. Dominique's gives away 90 quilts but receives 70 carpets in return, which is actually 16 more carpets than they could have produced themselves (70-54=16). So, the total gains from trade would be the additional amount each can consume thanks to trade: 20 quilts for Mikhail's and 16 carpets for Dominique's. Therefore, option 1) 20 carpets and 20 quilts is not accurate since Dominique's Parlor gains more carpets than quilts in the trade.