Alpha and Beta, two tiny islands off the east coast of Tricoli, produce pearls a

Question

Alpha and Beta, two tiny islands off the east coast of Tricoli, produce pearls and pineapples. The following production possibilities schedules describe their potential output in tons per year:

(a) Suppose Alpha is currently producing 6 tons of pearls and 15 tons of pineapples. If Alpha agrees to trade with Beta at a one for one exchange rate (e.g. one ton of pearls for one ton of pineapples), what would be Alpha's gains from trade? Assume that each country focuses production according to its comparative advantage and that Alpha will continue to consume 15 tons of pineapples.

Instructions: Enter your responses as a whole number.

Alpha will gain tons of pearls and tons of pineapples.

(b) Suppose Beta had been producing 30 tons of pearls and 8 tons of pineapples. What would be its gains from this trade? Assume that each country focuses production according to its comparative advantage and that Alpha will continue to consume 15 tons of pineapples.

Instructions: Enter your responses as a whole number.

Beta will gain tons of pearls and tons of pineapples.

Alpha Beta Pearls Pineapples Pearls Pineapples 0 30 0 20 2 25 10 16 4 20 20 12 6 15 30 8 8 10 40 4 10 5 45 2 12 0 50 0

Explanation / Answer

a)

Assuming Alpha still consumes 15 pinapples, The exchange rate is 2/5 that is 2/5 pearls must be given up for each pineapple produced. In Beta the ratio is 2 1/2 pearls for each pineapple.

Alpha increases production of pineapples from 15 to 25 while decreasing pearl production from 6 to 2

b)

Beta increases pearl production from 30 to 40 while decreasing pineapple production from 8 to 4.

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