Question

We continue the story of Robinson Crusoe from the previous problem. One day, while walking along the beach, Robinson Crusoe saw a canoe in the water. In the canoe was a native of a nearby island. The native told Robinson that on his island there were 100 people and that they all lived on fish and coconuts. The native said that on his island, it takes 2 hours to catch a fish and 1 hour to find a coconut. The native said that there was a competitive economy on his island and that fish were the numeraire. The price of coconuts on the neighboring island must

have been ........ The native offered to trade with Crusoe at these prices. “I will trade you either fish for coconuts or coconuts for fish at the exchange rate of 2 coconuts for a fish,” said he. “But you will have to give me 1 fish as payment for rowing over to your island.”

Would Robinson gain by trading with him? ........ If so, would he buy fish and sell coconuts or vice versa? ..........

a) Several days later, Robinson saw another canoe in the water on the other side of his island. In this canoe was a native who came from a different island. The native reported that on his island, one could catch only 1 fish for every 4 hours of fishing and that it takes 1 hour to find a coconut. This island also had a competitive economy. The native offered to trade with Robinson at the same exchange rate that prevailed on his own island, but said that he would have to have 2 fish in return for rowing between the islands. If Robinson decides to trade with this island, he chooses to produce only ........ and will get his ......... from the other island. On the graph above, use black ink to draw Robinson’s production possibility frontier if he doesn’t trade and use blue ink to show the bundles he can afford if he chooses to trade and specializes appropriately. Remember to take away 2 fish to pay the trader.

(Graph is 32x32 Fish on x and coconuts on y)

b) Write an equation for Crusoe’s “budget line” if he specializes appropriately and trades with the second trader. If he does this, what bundle

will he choose to consume? ........ Does he like this bundle better than the bundle he would have if he didn’t trade? .......

Answer 1

Answer-We continue the story of Robinson Crusoe from the previous
problem. One day, while walking along the beach, Robinson Crusoe saw
a canoe in the water. In the canoe was a native of a nearby island. The
native told Robinson that on his island there were 100 people and that
they all lived on fish and coconuts. The native said that on his island, it
takes 2 hours to catch a fish and 1 hour to find a coconut. The native said
that there was a competitive economy on his island and that fish were
the numeraire. The price of coconuts on the neighboring island must
have been $.50. The native offered to trade with Crusoe at these
prices. “I will trade you either fish for coconuts or coconuts for fish at
the exchange rate of 2 coconuts for a fish,” said he. “But you
will have to give me 1 fish as payment for rowing over to your island.”
Would Robinson gain by trading with him? No. If so, would he buy
fish and sell coconuts or vice versa? Neither. Since their
prices are the same as the rate at which
he can transform the two goods, he can gain
nothing by trading.

(a) Several days later, Robinson saw another canoe in the water on the
other side of his island. In this canoe was a native who came from a
different island. The native reported that on his island, one could catch
only 1 fish for every 4 hours of fishing and that it takes 1 hour to find a
coconut. This island also had a competitive economy. The native offered
to trade with Robinson at the same exchange rate that prevailed on his
own island, but said that he would have to have 2 fish in return for rowing
between the islands. If Robinson decides to trade with this island, he
chooses to produce only fish and will get his coconuts from
the other island. On the graph above, use black ink to draw Robinson’s
production possibility frontier if he doesn’t trade and use blue ink to
show the bundles he can afford if he chooses to trade and specializes
appropriately. Remember to take away 2 fish to pay the trader.

(b) Write an equation for Crusoe’s “budget line” if he specializes appropriately
and trades with the second trader. If he does this, what bundle
will he choose to consume? 3 fish, 12 coconuts. Does he
like this bundle better than the bundle he would have if he didn’t trade?, Yes