Chapter 4, Problem 2CYU

To determine

The question requires us to determine the reason for engagement in the trade of 1 fish for 1½ coconut.

Explanation of Solution

The mutually beneficial terms of trade are found between the seller’s opportunity cost of producing a good and the buyer’s opportunity cost of the same good.

Person A’s opportunity cost of producing one fish in terms of coconut is 3/4 while Person K’s opportunity cost of producing one fish in terms of coconut is 2.

So, the best suitable terms of trade rate which is mutually beneficial for both will lie between these two opportunity costs range. Thus, Person A and Person K will be ready to trade one fish for 1½ coconuts.