Help afarl File Edit View History Bookmarks Window MINDTAP Homework (Ch 03) Cons
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Help afarl File Edit View History Bookmarks Window MINDTAP Homework (Ch 03) Consider two neighboring Island countries called Euphoria and Contente. They each have 4 million labor hours available per month that they can use to produce corm, jeans, or a combination of both. The following table shows the amount of com or jeans that can be produced using 1 hour of labor Corn (Bushels per hour of labor) (Pairs per hour of labor) Country Euphoria Contente Intialy, ippose Contente uses 1 milion hours or labor per month to produce com and 3 milion has per month to produce peans, wide Eupnena uses 3 million hours of labor per month to produce com and 1 million hours per month to produce jeans. Consequently, Euphonia produces i5 million bushels of com and 20 million pairs of jeans, and Contente produces 8 miltion bushels of com and 48 milien pairs of jeans. Assume there are no other countries wiling to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of com and jeans it produces tuphorias opportunity deat of producing 1 bushel ofcorn is 4 pairs ofjeans, and Contente's opportunity cost of pro dog 1 bushel of com s 2 pairs of eans. Therefore, Contente has a comparative advantage in the production of corn, and Euphoria has a garate 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, thie country that produces corn wil produce 20 milion bushels per month, and the country that produces jeans wil produce 64 mition pairs per month. En the folowing table, enter each countrys production decison on the third row of the table (marked-producton MacBook AiExplanation / Answer
If a country has comparative advantage in production of a good then the country has lower opportunity cost of producing that good. Nations that produce according to their comparative advantage are maximizing the benefits that they receive from trade and consequently, their national welfare. The benefit that one country accrues from trade is called gains from trade.
From the table above the OC of corn to country E is 4 pairs of jeans and OC of corn in country C is 2 pairs of jeans. Then C has comparitive advantage in corn and E has advantage in jeans.
As both country spacialize, C will produce 32 million bushels of corn and E will produce 80 million pairs of jeans.
The total production of corn will rise by 9 million bushels and that of jeans will be 12 millions pairs.
Now after trade E will export 54 millions pairs of jeans for 18 million bushels of corn. The result is summarize in the table below
Euphoria
Contente
CORN
JEANS
CORN
JEANS
Without trade
Production
15
20
8
48
Consumption
15
20
8
48
With Trade
Production
0
80
32
0
Trade action
Import
Export
Export
Import
Consumption
18
80-54=26
32-12=20
54
Gains from trade
Increase in consumption
3
6
12
6
Euphoria
Contente
CORN
JEANS
CORN
JEANS
Without trade
Production
15
20
8
48
Consumption
15
20
8
48
With Trade
Production
0
80
32
0
Trade action
Import
Export
Export
Import
Consumption
18
80-54=26
32-12=20
54
Gains from trade
Increase in consumption
3
6
12
6
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