Question

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 corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor.

Country Corn (Bushels per hour of labor) Jeans (Pairs per hour of labor
Dolorium 5 20
Contente 8 16
Initially, suppose Contente uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce jeans while Dolorium uses 3 million hours of labor per week to produce corn and 1 million hours per week to produce jeans. Consequently, Dolorium produces 15 million bushels of corn and 20 million pairs of jeans, and Contente produces 8 million bushels of corn and 48 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 corn and jeans it produces.

Dolorium's opportunity cost of producing 1 bushel of corn is _____ of jeans, and Contente's opportunity cost of producing 1 bushel of corn is _____ of jeans. Therefore, _____ has a comparative advantage in the production of corn, and _____ has a comparative advantage in the production of jeans.

Suppose that each country decides to completely specialize in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces corn will produce _____ million bushels per week, and the country that produces jeans will produce _____ million pairs per week.

Answer 1

Dolorium's opportunity cost of producing 1 bushel of corn is 4 PAIRS of jeans, and Contente's opportunity cost of producing 1 bushel of corn is 2 PAIRS of jeans. Therefore, CONTENTE has a comparative advantage in the production of corn, and DOLORIUM has a comparative advantage in the production of jeans.

• Dolorium's opportunity cost of producing 1 pair of jeans = 1/4 of a corn bushel, while Contente's opportunity cost of producing 1 pair of jeans = 1/2 of a corn bushel.

Suppose that each country decides to completely specialize in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces corn will produce 32 million bushels per week, and the country that produces jeans will produce 80 million pairs per week.

• Dolorium will be able to produce 20 x 4,000,000 = 80,000,000 pairs of jeans, while Contente will be able to produce 8 x 4,000,000 = 32,000,000 bushels of corn.