Steve and Lee have been shipwrecked on a deserted island in the Hawaiian chain. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same

time Lee can reel in two fish or harvest two baskets of pineapples. If they each spend four hours a day fishing and four hours a day harvesting pineapples, how many of each will Steve produce? How many will Lee produce? What will their total production be? If Steve and Lee don't trade with each other, who is better off? Why? Assume Lee and Steve both operate on straight-line production possibilities curves. What is Steve's opportunity cost of producing a basket of pineapples? Of a producing a fish? What is Lee's opportunity cost of producing a basket of pineapples? Of a producing a fish? If Steve and Lee traded, who has the comparative advantage in fish? Pineapples? If Lee and Steve specialize in and trade the good in which they have a comparative advantage, how much of each good will be produced in an eight hour day? What are the gains from trade?

Steve produces 16 fish per day (4 hours ? 4 fish per hour) and 8 baskets of pineapples (4 hours ? 2 baskets per hour). Lee produces 8 fish per day (4 hours ? 2 fish per hour) and 8 baskets of pineapples (4 hours ? 2 baskets per hour).

Steve is better off because he has more fish and the same number of pineapples and works no more time than Lee. Steve has an absolute advantage in fish production.

Steve's opportunity cost of a basket of pineapples is 2 fish; his opportunity cost of a fish is 1/2 basket of pineapples. Lee's opportunity cost of a basket of pineapples is 1 fish; his opportunity cost of a fish is 1 basket of pineapples.

Lee has a comparative advantage in pineapple harvesting since he has the relatively lowest opportunity cost. Steve has a comparative advantage in fish production since his opportunity cost is lower.

Lee can produce 16 baskets of pineapples in an eight-hour day. Steve can produce 32 fish in an eight-hour day. The gains from trade are the eight extra fish produced. Specialization in the activity in which Lee and Steve have the lowest opportunity cost allows them to increase the number of fish they produce with no more time worked or no fewer pineapples consumed.