: Homework (Ch 03) Attempts: Average: 74 3. Gains from trade Consider two neighboring Island countries called Contente and Dolorium. They each have 4 million labor hours available per month 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. Country Contente Dolorum Jeans (Pairs per hour of labor) 8 5 Rye (Bushels per hour of labor) 16 20 Initially, suppose Contente uses 1 million hours of labor per month to produce Jeans and 3 million hours per month to produce rye, while Dolorum uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce rye. Consequently, Contente produces 8 million pairs of jeans and 48 million bushels of rye, and Dolorium produces 15 milion pairs of Jeans and 20 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. Contente’s opportunity cost of producing 1 pair of jeans is of rye, and Dolorum’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. 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 month, and the country that produces rye will produce million bushels per month.