You are the Minister of Trade for a small island country in

You are the Minister of Trade for a small island country in the south Pacific with the annual production possibilities curve depicted below on the left.

Solution

4.

Table of production

Place

Production

Coconut

Fish

Own island

500

1,500

Other island

500

2,500

a.

Opportunity costs:

Place

Production

Coconut

Fish

Own island

1,500 / 500 = 3

500 / 1,500 = 0.33

Other island

2,500 / 500 = 5

500 / 2,500 = 0.2

Own island specialized in coconut, since its opportunity cost is lower than the other island.

Other island specialized in fish, since its opportunity cost is lower than the own island.

c.

This offer should not be accepted, because producing (1,500 – 1,200 =) 300 quantities of fish require an additional opportunity cost of ($0.33 × 300 =) $99.

Place	Production
Coconut	Fish
Own island	500	1,500
Other island	500	2,500