Consider two neighboring island countries called Euphoria and Arcadia. They each
ID: 1134411 • Letter: C
Question
Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per month 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 Corn Jeans Country (Bushels per hour of labor) (Pairs per hour of labor) Euphoria Arcadia 32 12 24 Initially, suppose Arcadia uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Euphoria uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Euphoria produces 24 million bushels of corn and 32 million pairs of jeans, and Arcadia produces 12 million bushels of corn and 72 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. Euphoria's opportunity cost of producing 1 bushel of corn is of jeans, and Arcadia'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 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 corn will produce million bushels per month, and the country that produces jeans will produce million pairs per month In the following table, enter each country's production decision on the third row of the table (marked "Production") Suppose the country that produces corn trades 26 million bushels of corn to the other country in exchange for 78 million pairs of jeans 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 corn was 36 million bushels per month, and the total production of jeans was 104 million pairs per month. Because of specialization, the total production of corn has increased by production of jeans has increased by million bushels per month, and the total million pairs per monthExplanation / Answer
Euphoria's opportunity cost of producing 1 bushel of corn is 128/32= 4 pairs of jeans , and Arcadia's opportunity cost of producing 1 bushel of corn is 96/48 = 2 pairs of jeans.Therefore, Arcadia has a comparative advantage in the production of corn because it has the lower opportunity cost in producing corn. And Euphoria has a comparative advantage in the production of jeans because it has a lower opportunity cost of producing jeans.
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 corn (i.e Arcadia ) will produce 48 million bushels per month and the country that produces jeans (i.e Euphoria ) will produce 128 million pairs per month.
Suppose the country that produces corn trades 26 million bushels of corn to the other country in exchange for 78 million pairs of jeans.
When the two countries did not specialize , the total production of corn was 36 million bushels per month ,and the total production of jeans was 104 million pairs per month. Because of specialisation, the total production of corn is 48 million bushels per month and total production of jeans is 128 million pairs per month. This implies that total prodcution of corn has increased by (48-36)=12 million bushels per month. And total production of jeans has increased by (128-104)=24 million pairs per month.
Because the two countries produce more corn and more jeans under specialisation , each country is able to gain from trade.
Country Corn (in million bushels) Jeans (in million pairs) Euphoria 32 128 Arcadia 48 96