Principles of Microeconomics
Gilligan and Robinson are stranded on a desert island. To feed themselves each day they can either
catch fish or pick fruit as specified in the table below.
a. Gilligan's opportunity cost of catching/producing a fish is
b. Gilligan's opportunity cost of harvesting one more fruit is
1/2 or .5
c. Robinson's opportunity cost of catching/producing a fish is
2/3 or .6
d. Robinson's opportunity cost of harvesting one more fruit is
3/2 or 1.5
comparative advantage in fishing
comparative advantage in fruit picking Gilligan
absolute advantage in
Absolute advantage in fruit picking
Inlandia and Outlandia can both produce cars or wheat. The opportunity cost of a car in Inlandia
is 40 bushels of wheat. The opportunity
cost of a car in Outlandia is 200 bushels of wheat. The most wheat Inlandia can possibly produce is 10,000 bushels
and the most wheat Outlandia can possibly produce is 2 million.
a. What is the greatest number
of cars that can be produced in Inlandia?
b. What is the greatest number
of cars that can be produced in Outlandia?
Low-Hanging-Fruit Principle apply in Inlandia or Outlandia? That is, does each additional bushel of wheat
require that the nation forego increasing numbers of cars? Yes
If the two countries sign a trade agreement to specialize
according to their comparative advantage, what should each country produce?
If these are the only two countries in the world that are open
to trade, what are the maximum and minimum prices that can prevail on the world
market for a bushel of wheat (in terms of cars)?
(1/200, 1/40) or (.005, .025)
3. It is possible for a nation to
have an absolute advantage in the production of ALL goods.
4. It is possible for a nation to
have a comparative advantage in all goods.