Crusoe finds himself stranded on an island. He devotes 10 hours each day to either gathering...

Crusoe finds himself stranded on an island. He devotes 10 hours each day to either gathering coconuts or catching fish. Crusoe can gather 2 coconuts in an hour, but he needs 5 hours to catch a single fish. On the other side of the island is Friday. Friday also devotes 10 hours each day to gathering coconuts and fishing. He can gather 3 coconuts per hour and needs only 2.5 hours to catch a fish.

a. What is the opportunity cost of gathering a coconut for Crusoe? For Friday?

b. What is the opportunity cost for gathering a coconut for Crusoe? For Friday?

c. Draw Crusoe's production possibilieies frontier with coconuts on the x-axis. Give its equation. On a sperate graph, do the same for Friday.

One day, Crusoe and Friday befriend each other and they decide to work together.

d. Who should specialize in coconuts? In fish? Justify your answer using the language of comparitive advantage.

e. Draw a new joing PPF (reflecting their combines production possibilities).

Solutions

Expert Solution

Crusoe devotes 10 hours each day to either gathering coconuts or catching fish. Crusoe can gather 2 coconuts in an hour, but he needs 5 hours to catch a single fish. Hence, he can catch 2 fishes or gather 20 coconuts in one day. This implies that his opportunity cost of catching a fish is 10 coconuts.

Friday, meanwhile, can gather 3 coconuts per hour and needs only 2.5 hours to catch a fish. Hence, he can catch 4 fishes or gather 30 coconuts in one day. This implies that his opportunity cost of catching a fish is 30/4 coconuts

a. What is the opportunity cost of gathering a coconut for Crusoe? For Friday?

It is 1/10 fishes for Crusoe and 4/30 fishes for Friday.

b. What is the opportunity cost for gathering a coconut for Crusoe? For Friday?

It is 1/10 fishes for Crusoe and 4/30 fishes for Friday.

c. Crusoe's production possibilities frontier with coconuts on the x-axis is drawn below. Its equation is 10F + C = 20. For Friday the equation of PPF is 2C + 15F = 60

One day, Crusoe and Friday befriend each other and they decide to work together.

d. Because Crusoe has a lower opportunity cost in coconuts, he should specialize in coconuts and Friday has lower opportunity cost in Fish so he should specialize in fish. This is the basic principle of comparative advantage.

e. The new joined PPF reflecting their combines production possibilities is shown below. Crusoe produces 20 coconuts and Friday produces 4 fishes.

Rahul Sunny answered 1 year ago

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