Question

Bob and Nancy live alone on a tropical island, on which mangoes grow and crabs live. Due to the island’s peculiar geography, their production possibilities curves consist of just three points. Reference the table below when answering the NEXT TWO questions.

Bob		Nancy
Mangoes	Crabs	Mangoes	Crabs
0	8	0	10
6	4	10	5
12	0	20	0

Under which of these terms is trade beneficial?

4 crabs trade for 5 mangoes

4 crabs trade for 7 mangoes

4 crabs trade for 9 mangoes

4 crabs trade for 11 mangoes

Suppose Bob and Nancy specialize optimally before trade and that trade takes place at the price of two mangoes for every crab. Which of the following might occur?

Nancy consumes 9 crabs and 2 mangoes, giving her 2 more mangoes than if she couldn’t trade.

Bob consumes 6 mangoes and 7 crabs, giving him 3 more crabs than if he couldn’t trade.

Nancy consumes 15 mangoes and 5 crabs, giving her 5 more mangoes than if she couldn’t trade.

Bob consumes 12 mangoes and 2 crabs, giving him 2 more crabs than if he couldn’t trade.

Answer 1

Bob has a comparative advantage in production if Crabs and Nancy has a comparative advantage in the production of Mangoes.

1) As long as Bob is getting more than 5 mangoes for 4 crabs he will trade and as long as Nacy is giving less than 12 mangoes for 4 crabs she will trade.

The correct answer to this question is option "b", "c", and "d". The trade is beneficial in all these three terms. Least beneficial in option "b" and most beneficial in option "d".

2) Nancy would consume 9 crabs and 2 mangoes, giving her 2 more mangoes than if she couldn't trade. With specialization, she would produce 20 mangoes and exchange it for 9 crabs and give up 18 mangoes. She is left with 2 mangoes and 18 crabs. If she hadn't traded she would only get 20 mangoes and no crab or 10 crabs and no mangoes.