Chapter 20, Problem 1P

To determine

(a)

To fill:

The given table based on the information.

Answer to Problem 1P

	Fish per day	Buckets of berry per day
Mr. B	32	16
Mr. L	16	16
Total	48	32

Explanation of Solution

If Mr. B spends 8 hours fishing and he catches 4 fishes per hour, therefore, he will catch (4x8) = 32 fishes per day. Similarly, if Mr. B spends 8 hours collecting berries at a speed of 2 buckets of berries in 1 hour him can collect (2x8) = 16 buckets of berries per day.

Mr. L can catch 2 fishes in 1 hour or harvest 2 buckets of berry in 1 hour. If he works 8 hours on fishing he can catch (2x8) = 16 fishes, and if he collects berries for 8 hours he can collect (2x8) = 16 buckets of berries per day.

Economics Concept Introduction

Economic activity:

The activities that involve producing or gathering, selling, purchasing and consuming goods and services in an economy are referred as economic activities.

To determine

(b)

To find:

The person who is in better off position without trading.

Answer to Problem 1P

With no trade Mr. B is better off than Mr. L.

Explanation of Solution

	Fish per day working 4 hours	Buckets of berry per day working 4 hours
Mr. B	16	8
Mr. L	8	8
Total	24	16

Both Mr. B and Mr. L have same number of buckets of berries, but Mr. B has caught a greater number of fishes, and hence, he is better off than Mr. L when there is no trade.

Economics Concept Introduction

Trade:

The exchange of goods and services from one another to earn profit and increase business is termed as trade.

To determine

(c)

To fill:

The table if both Mr. B and Mr. L operate on straight line production possibility curves.

Answer to Problem 1P

	Opportunity cost of a bucket of berries	Opportunity costs of fish
Mr. B	2	1/2
Mr. L	1	1

Explanation of Solution

Since working 8 hours Mr. B can either catch 32 fishes or harvest 16 buckets of berries, the opportunity cost of a bucket of berries in (32/16) = 2. Similarly, the opportunity cost of fish is (16/32) = 1/2.

For Mr. L, both the opportunity costs are 1 as he can either collect 16 buckets of berries or catch 16 fishes working 8 hours per day.

Economics Concept Introduction

Production possibility curve:

The graph showing different combinations of the quantities of two goods which can be produced with limited resources and technology is production possibility curve.

Opportunity cost:

The opportunity cost of goods and services is the cost of other commodities which has been given up. For example, producing one unit of the motorcycle needs to reduce the production of 15 cycles. Here, in this case, the opportunity cost of producing one motorcycle is 15 cycles.

To determine

(d)

To explain:

The persons having comparative advantage in fish and berries.

Answer to Problem 1P

Mr. B has a comparative advantage in catching fish and Mr. L has a comparative advantage in harvesting berries.

Explanation of Solution

Comparing the opportunity costs of each good for both the individuals, Mr. B catches fish at a lower opportunity cost compared to Mr. L, and Mr. L harvests berries at a lower opportunity cost than that of Mr. B. Therefore, Mr. B had comparative advantage in fish and Mr. L in berries.

Economics Concept Introduction

Comparative advantage:

The benefits of producing goods and services at lower opportunity cost than the other country is termed as comparative advantage.

To determine

(e)

To find:

The quantity of each good that will be produced in an 8-hour day. Also, the gains from trade must be calculated.

Answer to Problem 1P

Mr. B specializes in catching fish and produces 32 fishes working 8 hours per day and Mr. L specializes in collecting berries and harvests 16 buckets of berries working 8 hours per day. Mr. B will have no gain from trade, but Mr. L will enjoy 8 more fishes.

Explanation of Solution

Specializing in their respective goods of comparative advantage, Mr. B will produce 32 fishes and Mr. L will collect 16 buckets of berries.

Now, Mr. B will keep 16 fishes for his consumption and trade the remaining 16. Similarly, Mr. L will keep 8 buckets of berries for self-consumption and trade the rest.

Post trade, Mr. B will have 16 fishes and 8 buckets of berries while Mr. L will have 16 fishes and 8 buckets of berries. For Mr. B pre-trade and post trade situations are the same, hence, there is no gain form trade. But for Mr. L, there is an improvement of 8 fishes, which is his gain from trade.

Economics Concept Introduction

Comparative advantage:

The benefits of producing goods and services at lower opportunity cost than the other country is termed as comparative advantage.

Gains from trade:

The rise in the consumption level of an economy or an individual due to trade is referred as gains from trade.