Ch 3 Gains from Trade bb

Ch 3 Gains from Trade bb - Copyright © 2006 Nelson, a...

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Unformatted text preview: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 3 Comparative Advantage & Gains from Trade 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: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. MEAT or POTATOES Peyton 8 oz 32 oz Rodgers 24 oz 48 oz 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. 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 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. Copyright © 2006 Nelson, a division of Thomson Canada Ltd.Nelson, a division of Thomson Canada Ltd....
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This note was uploaded on 07/05/2011 for the course ECON 1B03 taught by Professor Hannahholmes during the Spring '08 term at McMaster University.

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Ch 3 Gains from Trade bb - Copyright © 2006 Nelson, a...

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