The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts. FIGURE 32-3 Refer to Figure 32-3.Suppose a trading partner offers to give bananas to Robinson Crusoe in exchange for his coconuts.If Robinson Crusoe is to improve his consumption possibilities from this trade,the terms of trade must be 1 kg bananas for

Question

The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.  FIGURE 32-3 Refer to Figure 32-3.Suppose a trading partner offers to give bananas to Robinson Crusoe in exchange for his coconuts.If Robinson Crusoe is to improve his consumption possibilities from this trade,the terms of trade must be 1 kg bananas for

Quizplus · Accepted Answer

The slope of Robinson Crusoe's production possibility boundary is -1/2, meaning that in order to produce an additional kilogram of bananas, he must give up producing 0.5 kilograms of coconuts. Therefore, for trade to be beneficial, the terms of trade must offer a ratio greater than 0.5 kilograms of coconuts per kilogram of bananas. The only answer that meets this criterion is E, where Robinson Crusoe gives up 3 kilograms of coconuts for every 1 kilogram of bananas received. This gives him an opportunity cost of 0.33 kilograms of coconuts per kilogram of bananas, allowing him to consume outside of his production possibility boundary.

The Diagram Below Shows Robinson Crusoe's Annual Production Possibilities Boundary