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quinnipiac micro hubbard chap 2 suppl.

# quinnipiac micro hubbard chap 2 suppl. - product in which...

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Table 2-2: You: 20 cherries or 20 apples Neighbor: 60 cherries or 30 apples Opportunity Costs: You have Comparative Advantage in picking apples, since you only have to give up 1 lb. of cherries for 1 lb. of apples. (Neighbor would have to give up 2 lbs; 60/30) Neighbor has Comparative Advantage in picking cherries, since he only has to give up ½ lb. of apples (30/60) for 1 lb. of cherries. (You have to give up 1 lb.) Figure 2-5: Consumption Possibilities without trade: You – figure (a): Point A : 8 apples & 12 cherries; You have “given up” (opportunity cost) 12 apples for 12 cherries (1:1) Your neighbor – figure (b): Point B : 9 apples & 42 cherries Neighbor has “given up” 21 apples (30-9) for 42 cherries (.5:1) Total production of both fruits: 17 apples (8+9) & 54 cherries (12 +42) Figure 2-5 & Table 2-1: Potential gains from each individual specializing in the production of that
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Unformatted text preview: product in which he has the comparative advantage (lower opportunity cost), and then trading with each other: You specialize in apples – total apple production will be 20 lbs. (vs. 17 lbs. before); Neighbor specializes in cherries – total cherry production will be 60 lbs. (vs. 54 lbs before); Total Production = 20 lbs. apples & 60 lbs. cherries (vs. 17 & 54 before specialization) Possible terms of trade between the 2 parties: You trade 10 lbs of apples for 15 lbs of cherries (2:3 or 1:1.5); Point A’: Now you will have 10 lbs of apples (20-10; a gain of 2 as compared to “without trade” & 15 lbs of cherries as compared to 12 without trade) Point B’: Neighbor keeps 45 lbs of cherries he produced (60-15), a gain of 3lbs, and now has 10 lbs of apples he received from you in the trade (vs. 9 lbs with his own production of apples)...
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