You are the Minister of Trade for a small island country in the South Pacific with the following annual production possibilities curve: You are negotiating a deal with a neighboring island that has the following annual PPC: Refer to the figure above. Both islands specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell the other island 350 coconuts in exchange for 1,300 fish. After the trade your island has a total of _____ coconuts and _____ fish.

Question

You are the Minister of Trade for a small island country in the South Pacific with the following annual production possibilities curve:  You are negotiating a deal with a neighboring island that has the following annual PPC:  Refer to the figure above. Both islands specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell the other island 350 coconuts in exchange for 1,300 fish. After the trade your island has a total of _____ coconuts and _____ fish.

Quizplus · Accepted Answer

To determine the best choice, we must first identify which island has a comparative advantage in coconuts and which has a comparative advantage in fish. Looking at the PPCs, we can see that the first island has a steeper curve for fish than for coconuts, meaning it has a comparative advantage in fish. The second island has a steeper curve for coconuts than for fish, meaning it has a comparative advantage in coconuts.

In this trade deal, the first island is selling coconuts to the second island and receiving fish in return. This allows both islands to specialize in their respective areas of comparative advantage and leads to an increase in overall production and consumption.

To find the new production levels, we can use the following calculations:

First Island: 
Starting Production: 500 coconuts, 1,500 fish 
Selling 350 coconuts 
New Production: 150 coconuts, 1,500 fish

Second Island: 
Starting Production: 1,000 coconuts, 800 fish 
Receiving 350 coconuts 
New Production: 1,350 coconuts, 2,100 fish

Therefore, the answer is C: 150 coconuts and 1,300 fish.

You Are the Minister of Trade for a Small Island