Question

Initially, suppose Bellissima 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 12 million bushels of corn and 16 million pairs of jeans, and Bellissima produces 6 million bushels of corn and 36 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 pair of jeans is ______________ of rye, and Bellissima'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.

Answer 1

Answer:

4 bushels,   2 bushels,   Bellisima,   Euphoria

Explanation:

Remember, opportunity cost as used in this context refers to the loss of other profit alternatives when one alternative is chosen. In this scenario if we consider the two neighboring countires called Acadia and Euphoria. Both have 4 million labor hours per month that they can use to produce corn, jeans, or a combination of both.

Euphoria produces 4 bushels of corn per hour and 16 pairs of jeans. Acadia produces 5 bushels of corn per hour and 10 pairs of jeans. Euphoria produces 12 million bushels of corn and 16 million pairs of jeans and Acadia produces 5 million bushels of corn and 30 million pairs of jeans.

Euphoria's opportunity cost of producing one bushel of corn is $\frac{16}{4}$ = 4 pairs of jeans and

Acadia's cost of producing one bushel of corn is $\frac{10}{5}$= 2 pairs of jeans.

Finanlly, It is obvious that Acadia has the comparative advantage of producing corn, and Euphoria has the comparative advantage of producing jeans.