Question

Alpha and Beta, two tiny islands in the Pacific, produce pearls and pineapples. The following production possibilities schedules describe their potential output in tons per year:

Instructions: Enter your responses as a whole number.

 

Suppose Alpha and Beta agree that the terms of trade will be one for one and exchange 10 pearls for 10 pineapples.

 

a. If Alpha produced 6 pearls and 15 pineapples while Beta produced 30 pearls and 8 pineapples before they decided to trade, how many pearls would each be producing after trade? Assume that the two countries specialize according to their comparative advantage.

 

     (i) Alpha:  pearls

 

     (ii) Beta:  pearls

 

b. How much would the combined production of pineapples increase for the two islands due to specialization?

 

      pineapples

 

c. How much would the combined production of pearls increase?

 

      pearls

 

d. What is the post-trade consumption for each island?

 

     Alpha consumes  pearls and  pineapples.

 

     Beta consumes  pearls and  pineapples.

Answer 1

a) If A produced 6 pearls and 15 pineapples, while B produced 30 pearls and 8 pineapples before the trade, we can calculate the opportunity cost for each island.

For island A, their opportunity cost will be:

6 pearls = 15 pineapples

1 pearl = 15/6 pineapples

1 pearl = 2.5 pineapples

Therefore, the opportunity cost of pearls for A is 2.5 pineapples

For island B, their opportunity cost will be:

30 pearls = 8 pineapples

1 pearl = 8/30 pineapples

1 pearl = 0.27 pineapples

Therefore, the opportunity cost of pearls for A is 0.27 pineapples

It appears that A will increase production of pineapples from 15 pineapples to 25 pineapples, and due to their opportunity cost, will decrease pearl production from 6 pearls to 2 pearls

It appears that B will increase the production of pearls from 30 pearls to 40 pearls, and due to their opportunity cost, will decrease pineapple production from 8 pineapples to 4 pineapples.