Question

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3. You and your neighbor are the only people in a world that produces only berries and squash. You do not engage in trade with each other. On your own, you can each produce the following per day: You Neighbor Berries Squash Berries Squash Only gather berries 24 pounds O pounds 8 pounds 0 pounds Only gather squash pounds 12 pounds 0 pounds 8 pounds Right now you each split your time between gathering the two products. You currently gather and consume 16 pounds of berries and 4 pounds of squash, while your neighbor is gathering and consuming 6 pounds of berries and 2 pounds of squash. Show (both graphically and numerically) how specialization and then trade with each other can make both of you better off. Who specializes in the production of each product? After specialization, what is an example of a trade that would be beneficial for both of you to make?

Answer 1

Answer:

3.

Your opportunity cost of 1 berrie = Total squash given up/Total berrie gathered = 12/24 = 0.5 squash
Your opportunity cost of 1 squash = Total berrie given up/Total squash gathered = 24/12 = 2 berrie

Neighbour's opportunity cost of 1 berrie = Total squash given up/Total berrie gathered = 8/8 = 1 squash
Neighbour's opportunity cost of 1 squash = Total berrie given up/Total squash gathered = 8/8 = 1 berrie

So, You have comparative advantage in berries as your opportunity cost is lower for it. And, neighbour has comparative advantage in squash as his opportunity cost is lower for it.

Thus, You will specialize in gathering berries . You will gather 24 pounds berries and 0 squash .
Neighbour will specialize in gathering squash . Neighbour will gather 0 berries and 8 pounds squash .

If they exchange 1 pound of squash for 1.5 pounds of berries , then,
Neighbour can give 4 pounds of squash and it will get 1.5*4 = 6 pounds of berries .

So, neighbour will consume 8 - 6 = 2 pounds of squash and 6 pounds of berries after trade.

Thus, it is beneficial for neighbour as he consumes an additional pound of squash after trade.

You will consume 24 - 6 = 18 pounds of berries , and 4 pounds of squash after trade.

Thus, it is beneficial for you as you consume an additional pound of berries after trade

Graph: A suash a squash 12 5.33 B 29 Berries o 8 9 Berries