The following table represents the relationship between two people stranded on a

Question

The following table represents the relationship between two people stranded on an island.

Pat Mike

Coconuts per day: 40 20

Fish per day: 35 28

According to the table, Pat can collect 40 coconuts per day to Mike’s 20, and Pat can catch 35 fish per day to Mike’s 28. Using the principles of comparative advantage, answer the following questions:

•What is the opportunity cost for fish for both Pat and Mike?

•What is the opportunity cost for coconuts for both Pat and Mike?

•Comparing these opportunity costs, who should specialize in catching fish, and who should specialize in collecting coconuts?

•What is the increase in consumption for both Pat and Mike if they specialize in the correct product?

Explanation / Answer

Opportunity cost for fish for Pat is 35 / 40 = 7 / 8

Opportunity cost for fish for Mike is 28 / 20 = 7 / 5

Opportunity cost for coconuts for Pat is 40 / 35 = 8 / 7

Opportunity cost for coconuts for Mike is 20 / 28 = 5 / 7

Now from theorem we know that a individual is specialized in producing a good if the opportunity cost of producing a good by the individual is less than other individual.

So, we can say that Pat is specialized in producing fish because opportunity cost 7 / 8 < 7 / 5.

And , Mike is specialized in producing coconuts because opportunity cost 5 / 7 < 8 / 7.

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