3. Gains from trade Consider two neighboring island countries called Felicidad and Bellissima. They

Question: 3. Gains from trade Consider two neighboring island countries called Felicidad and Bellissima. They each have 4 million labor hours available per week that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor. Jeans Rye (Pairs per hour of labor) (BushelsShow transcribed image textFelicidad’s opportunity cost of producing 1 pairs of jeans is = 20/5= 4 bushel of rye, and Bellissima’s opportunity cost of producing 1 pairs of jeans is = 16/8 = 2 bushel of rye Therefore, Bellissim…View the full answerTranscribed image text: 3. Gains from trade Consider two neighboring island countries called Felicidad and Bellissima. They each have 4 million labor hours available per week that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor. Jeans Rye (Pairs per hour of labor) (Bushels per hour of labor) Country Felicidad 5 20 Bellissima 8 16 Initially, suppose Bellissima uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Felicidad uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Felicidad pipduces 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. Felicidad’s opportunity cost of producing 1 pair of jeans is of rye. Therefore, of rye, and Bellissima’s opportunity cost of producing 1 pair of jeans is has a comparative has a comparative advantage in the production of jeans, and advantage in the production of rye. it has a comparative advantage, producing only that good. In 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 jeans will produce million pairs per week, and the country that produces rye will produce million bushels per week. In the following table, enter each country’s production decision on the third row of the table (marked “Production”). Suppose the country that produces jeans trades 10 million pairs of jeans to the other country in exchange for 54 million bushels of rye. 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 jeans was 23 million pairs per week, and the total production of rye was 68 million million pairs per week, and the hotal production of bushels per week. Because of specialization, the total production of jeans has increased by rye has increased by million bushels per week. Because the two countries produce more jeans and more rye under specialization, each country is able to gain from trade. Calculate the gains from trade-that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked “Increase in Consumption”). Homework (CITUS) bushels per week. Because of specialization, the total production of jeans has increased by rye has increased by million bushels per week. million pairs per week, and the total production of Because the two countries produce more jeans and more rye under specialization, each country is able to gain from trade Calculate the gains from trade-that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked “Increase in Consumption”). Felicidad Bellissima Jeans Rye Jeans Rye (Millions of pairs) (Millions of bushels) (Millions of pairs) (Millions of bushels) Without Trade: Production 40 15 20 48 15 20 Consumption With Trade Production Trade action Consumption Gains from Trade Increase in Consumption