Question

Suppose Rupert can specialize and produce either 50 fish and 0 bottles of w ater , or 0 fish and 25 bottles of w ater ; and Russell can produce 15 fish and 0 bottles of w ater , or 0 fish and 45 bottles of w ater , and assuming constant opportunity costs:

a . State which person has a comparative advantage in fish . Explain why. ( 5 points )

Rupert:25/50=0.5

Russell:45/15=3

Russell copportunity costs bigger than Rupert, so Russell has a comparative advantage in fish.

b . Using your answer in part a , if the terms of trade are 1 fish = 1.5 bottles of water , and Rupert initially produces 30 fish and 1 0 bottles of water , and Russell initially produces 6 fish and 27 bottles of w ater , what are the gains from specialization and trade to each person if Rupert trades 10 units of the good he has a comparative advantage in ? ( 5 points )

Answer 1

b) Now Rupert produces 50 fishes. He trades 10 fishes.

Consumption of bottles of water after trade = 1.5*10 = 15

Increase in consumption

Change in consumption = Consumption after trade – Consumption without trade

• Fish = 40 – 30 = 10
• Water = 15 – 10 = 5.
• Rupert now consumes 10 more fishes and 5 water bottle more after trade

Russell

Consumption of fishes after trade = 10 fishes

Consumption of water bottles after trade = 45 -15 = 30.

Change in consumption = Consumption after trade – Consumption without trade

• Fish = 10 – 6 = 4
• Water = 30 - 27 = 3.
• Russell now consumes 4 more fishes and 3 water bottle more after trade