Question

2. (20 points) Costa Rica and Honduras produce two goods, bananas and pineapples. The leaders of the two countries got together and decided each should specialize in one of the two goods and then trade. However, they (being typical politicians) couldn't figure out what good each country should produce. They hire two economists (one from each country) to determine the direction of trade. They obtain daily output per worker of each good in each country. The data are shown in the table below. Pineapples Output per worker in tons Costa Rica Honduras Bananas 10

a,b,c

Answer 1

Answer:

a. From the given table we know that output per worker for banana is 10 in Costa Rica and 6 in Honduras. As Costa Rica has higher output per worker, Costa Rica has the absolute advantage in the production of bananas.

Similarly, in the production of pineapples, Costa Rica has the absolute advantage as each worker in Costa Rica can produce 6 pineapples while output per worker in Honduras is 1 pineapple. So Costa Rica has absolute advantage in the production of pineapple too.

b.Production possibility frontier for Costa rica and Honduras are as follows:

180 MANA Costa Rica Pineapple
  
AROLO Honduras Pineapple.
  

If we draft the PPF for both the countries on the same graph, it would look like this:

  

Во текол TO Costa Rica Honduras Pineapple

c. Opportunity cost (OC) for Costa Rica is as follows:

OC of Banana = 5 pineapples per 10 banana = 5/ 10 = ½

OC of pineapple = 10 bananas for 5 pineapples = 10/ 5 = 2

Opportunity cost (OC) for Honduras is as follows:

OC of banana = 1 pineapple per 6 bananas = 1/6

OC of pineapple = 6 bananas for 1 pineapple = 6/1 = 6

OC in the tabular form for both the countries:   

	Costa Rica	Honduras
Banana	1/2	1/6
Pineapple	2	6