Ch 3 Gains from Trade bb - Chapter 3 Comparative Advantage...

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