4. |Production Possibilities Frontier] Jake and Larry find themselves on a deser

Question

4. |Production Possibilities Frontier] Jake and Larry find themselves on a deserted island. Jake can either produce 5 fish or 10 coconuts in a day (or any combination in between). Larry can produce either & fish or 4 coconuts in a day (or any combination in between). Jake prefers to consume 6 coconuts when producing/consuming alone, and Larry prefers 4 coconuts when producing/consuming alone. They also enjoy the corresponding number of fish, respectively. Find their gains from specialization if they decide to specialize and trade their output (that is, how many extra fish and/or coconuts can they jointly consume?) Write your answer here

Explanation / Answer

For Jake,

Opportunity cost of producing 1 Fish = (10/5) = 2 units of coconuts

Opportunity cost of producing 1 Coconut = (5/10) = .5 unit of fish

For Larry,

Opportunity cost of producing 1 Fish = (4/8) = .5 units of coconuts

Opportunity cost of producing 1 Coconut = (8/4) = 2 unit of fish

On the basis of above calculation, Jake has lower opportunity cost in producing coconuts and Larry has relatively lower opportunity cost in producing fish.

So, Jake will specialize in producing only coconuts and Larry will specialize in producing fish.

Since, Jake prefers to consume 6 number of Coconuts, then additional number of coconuts = 10-6 = 4

Since, Larry prefers to consume 6 number of fish, then additional number of fish = 8-6 = 2

In this scenario,

Jake and Larry will trade with each other as Jack as additional 4 units of coconuts and Larry has 2 units of fish.

So,

Additional gain to Jake due to specialization = 2 fish (after trade with 4 coconuts)

Additional gain to Larry due to specialization = 4 coconuts (after trade with 2 units of fish)

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