Question

Tom Hanks and a man named Wilson are stranded on a tropical island. In one hour Tom can cut down 5 coconuts or catch 11 fish. In one hour Wilson can cut down 15 coconuts or catch 6 fish. A) Who has the comparative advantage at producing coconuts? B) Who has the comparative advantage at producing fish? C) What is Tom's opportunity cost of producing a coconut? D) If Tom and Wilson specialize and trade with each other, what is the range of acceptable terms of exchange of coconuts for fish?

Answer 1

Answer:

A. Wilson

B. Tom

C. 0.45

D. 0.3 and 3

Explanation:

Tom comparative advantage: using the formula; number of cut down / the other's number of cut down.

For Coconut= 5/15=0.3

For Fish= 11/6=1.8

Wilson comparative advantage: using same formula above

For Coconut= 15/3=3

For Fish= 6/11=0.5

A. Thus, we can conclude that Wilson has comparative advantage of producing coconut since he has the higher ratio of 3.

B. We conclude that Tom having the ratio value of 1.8 which is greater than that of Wilson has the comparative advantage.

C. Tom's opportunity cost of producing a coconut is calculated by dividing his number of coconut over his number of fish = 5/11 = 0.45

D) Note the range of acceptable terms of exchange of coconuts for fish should be be 0.3 and 3.