Question

Question 2:

After the same cruise ship accident, Ron and Don are deserted on a separate island.

Unfortunately for them, they did not manage to bring anything with them. On the island, there

are only two edible items: Bananas (B) and Coconuts (C). Each day, Ron and Don go and collect

fruit. Ron is twice as good at collecting bananas as he is at collecting coconuts and the maximum

number of bananas he could collect in a day is 24. Don is the opposite: he is twice as good at

collecting coconuts as he is at collecting Bananas and could collect a maximum of 24 coconuts in a day.

(a) Suppose Ron and Don are not getting along (Don accused Ron of stealing his binoculars)

and refuse to trade. Draw a diagram showing the production possibilities frontier for Don,

and a separate diagram for Ron.

(b) For Ron, what is the “price” of collecting a coconut? What about for Don?

(c) Suppose Ron and Don both have the same utility function:

U=B^0.5C^0.5. How many bananas and coconuts will Ron and Don each produce (and then consume)?

(d) After some time, Ron and Don reconcile and discuss the possibility of trading with one

another. By cooperating, how much of each fruit will Ron and Don produce? Will they be

better off?

(e) Suppose they play the same market game as Annie and Bert to escape boredom, and the

prices are pB=pD=1. How much fruit will each person collect? At these prices, how

many bananas are demanded by Don and how many bananas is Ron willing to supply?

Answer 1