Consider two neighboring island countries called Bellissima and Felicidad. They

ID: 1123274 • Letter: C

Question

Consider two neighboring island countries called Bellissima and Felicidad. They each have 4 million labor hours available per month that they can use to produce jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labon. Jeans Corn Country (Pairs per hour of labor) (Bushels per hour of labor) Bellissima Felicidad Initially, suppose Bellissima uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Bellissima produces 8 million pairs of jeans and 48 million bushels of corn, and Felicidad produces 15 million pairs of jeans and 20 million bushels of corn. 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 corn it produces Bellissima's opportunity cost of producing 1 pair of jeans is of corn, and Felicidad's opportunity cost of producing 1 pair of jeans is has a comparative advantage in the production of jeans, and has a comparative advantage in the production of corn. 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 jeans will produce million pairs per month, and the country that produces corn will prodcemillion bushels per month.

Explanation / Answer

First we derive the output table when both countries use 4 million hours for each good.

Jeans (Million)

Corn (Million)

Bellissima

8 x 4 = 32

16 x 4 = 64

Felicidad

5 x 4 = 20

20 x 4 = 80

(1) Opportunity cost (OC)

In Bellisima, OC of jeans = 64/32 = 2 corn

In Felicidad, OC of jeans = 80/20 = 4 corn

(2) So,

Bellissima has comparative advantage in jeans (because OC of jeans is lower).

Felicidad has comparative advantage in corn.

(3)

Country making jeans (Bellissima) will produce 32 million jeans (= 8 x 4 million).

Country making corn (Felicidad) will produce 80 million corn (= 20 x 4 million).

NOTE: For completion of table, information is needed as to how many of which good is traded, but this data is missing and table cannot be computed.