3 - Ch. 3 Comparative Advantage & Gains from Trade...

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1 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Ch. 3 Comparative Advantage & Gains from Trade Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Suppose there are 2 people trapped on an island: Peyton the potato farmer and Brett the beef rancher. s Only two goods are produced: potatoes and meat, and each person can produce both goods. s The following table gives information on how much they can produce of each good: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. MEAT or POTATOES MEAT POTATOES Peyton 8 oz 32 oz Brett 24 oz 48 oz
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2 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Suppose Peyton and Brett fend for themselves: s Each consumes what they each produce. s So, the production possibilities frontier is also a consumption possibilities frontier. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Let’s compute the opportunity costs of producing each good for each person: (let’s ignore the units of measurement for now). For Peyton: s To get 32 potatoes, give up 8 meat To get 1 potato, give up ¼ meat The opp.cost of a potato = ¼ meat The opp.cost of a meat = 4 potatoes Copyright © 2006 Nelson, a division of Thomson Canada Ltd. For Brett: s To get 48 potatoes, give up 24 meat To get 1 potato, give up ½ meat The opp.cost of a potato = ½ meat The opp.cost of a meat = 2 potatoes.
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3 - Ch. 3 Comparative Advantage & Gains from Trade...

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