Ch 3 Gains from Trade

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

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Unformatted text preview: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 3 Comparative Advantage & Gains from Trade • Suppose there are 2 people trapped on an island: Peyton the potato farmer and Rodgers the beef rancher. nly two goods are produced: potatoes and Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • 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: MEAT or POTATOES eyton 8 oz 32 oz Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Peyton 8 oz 32 oz Rodgers 24 oz 48 oz Suppose Peyton and Rodgers fend for themselves: ach consumes what they each produce. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • Each consumes what they each produce. • So, the production possibilities frontier is also a consumption possibilities frontier. • Let’s compute the opportunity costs of producing each good for each person: (let’s ignore the units of measurement for now). For Peyton: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. • 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 For Rodgers: • To get 48 potatoes, give up 24 meat o get 1 potato, give up ½ meat Copyright © 2006 Nelson, a division of Thomson Canada Ltd. To get 1 potato, give up ½ meat The opp.cost of a potato = ½ meat The opp.cost of a meat = 2 potatoes. • Let’s compare their opportunity costs: pp.Cost of Opp.Cost of Copyright © 2006 Nelson, a division of Thomson Canada Ltd....
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This note was uploaded on 09/16/2011 for the course ECON 101 taught by Professor Unknown during the Spring '10 term at University of Toronto.

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

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