You are the Minister of Trade for a small island country with the following annual PPC: You are negotiating a trade agreement with a neighboring island with the following annual PPC: Both islands specialize exclusively in the product for which they have a comparative advantage. You have agreed to give 350 coconuts to the other island 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 with the following annual PPC:  You are negotiating a trade agreement with a neighboring island with the following annual PPC:  Both islands specialize exclusively in the product for which they have a comparative advantage. You have agreed to give 350 coconuts to the other island in exchange for 1,300 fish. After the trade, your island has a total of ______ coconuts and ______ fish.

Quizplus · Accepted Answer

Before the trade, your island has a production possibility of 2,000 coconuts and 1,500 fish (point A). The other island has a production possibility of 4,000 coconuts and 4,000 fish (point B).

Your island has a comparative advantage in producing coconuts, and the other island has a comparative advantage in producing fish.

After the trade, your island will specialize in coconut production, and the other island will specialize in fish production.

You have agreed to give 350 coconuts to the other island in exchange for 1,300 fish, which means that trade will occur at a rate of 1 fish for every 0.27 coconuts (350/1,300 = 0.27).

With the 350 coconuts you have given away, your island will be left with 1,650 coconuts (2,000 - 350 = 1,650).

With the 1,300 fish you received, your island's production possibility will increase to 2,800 fish (1,500 + 1,300 = 2,800).

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

You Are the Minister of Trade for a Small Island