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

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 3 Comparative Advantage & Gains from Trade
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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 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 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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MEAT or POTATOES Peyton 8 oz 32 oz Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Rodgers 24 oz 48 oz
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Suppose Peyton and Rodgers fend for themselves: Each consumes what they each produce. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. So, the production possibilities frontier is also a consumption possibilities frontier.
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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 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 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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For Rodgers: To get 48 potatoes, give up 24 meat To get 1 potato, give up ½ meat Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The opp.cost of a potato = ½ meat The opp.cost of a meat = 2 potatoes.
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Let’s compare their opportunity costs: Opp.Cost of Opp.Cost of Copyright © 2006 Nelson, a division of Thomson Canada Ltd. a Potato a Meat PEYTON ¼ meat 4 potatoes RODGERS ½ meat 2 potatoes
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Comparative Advantage Peyton has a lower opportunity cost of
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