Question

Consider two neighboring island countries called Euphoria 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.

Rye Jeans
Country (Bushels per hour of labor) (Pairs per hour of labor)
Euphoria 4 16
Bellissima 6 12

Initially, suppose Bellissima uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce rye, while Euphoria uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce rye. Consequently, Euphoria produces 15 million pairs of jeans and 20 million bushels of rye, and Bellissima produces 8 million pairs of jeans and 48 million bushels of rye. 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 rye it produces.

Bellissima's opportunity cost of producing 1 pair of jeans is_________ of rye, and Euphoria's opportunity cost of producing 1 pair of jeans is _____________ of rye. Therefore, ___________ has a comparative advantage in the production of jeans, and __________ has a comparative advantage in the production of rye.

Suppose that each country completely specializes in the production of the good in which is has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce _________ million pairs per month, and the country that produces rye will produce _________-- million bushels per month.

Answer 1

Bellisima's opportunity cost:

• Production of rye per million hours of labor = 12 / 6 = 2 pairs of jeans
• Production of jeans per million hours of labor = 6 / 12 = 0.5 bushels of rye

Euphoria's opportunity cost:

• Production of rye per million hours of labor = 16 / 4 = 4 pairs of jeans
• Production of jeans per million hours of labor = 4 / 16 = 0.25 bushels of rye

Euphoria has a comparative advantage in the production of jeans while Bellisima has a comparative advantage in the production of rye.

If both countries specialize:

• Euphoria will produce 64 million pairs of jeans.
• Bellisima will produce 24 million bushels of rye.

Total production of rye has increased by 6 million bushels.

Total production of jeans has increased by 12 million pairs.