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

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 3 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. Let’s compare their opportunity costs: Opp.Cost of Opp.Cost of a Potato a Meat PEYTON ¼ meat 4 potatoes RODGERS ½ meat 2 potatoes
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
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Ch 3 Gains from Trade - Chapter 3 Comparative Advantage...

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