Consider two countries, Anguilla and Montserrat. Suppose each can produce two goods: Fish and Rum. Anguilla as 15,000 people, and it takes 5 people to produce 1 load of fish, and 6 people to produce 1 load of rum. Montserrat has 12,000 people, and it takes 3 people to produce 1 load of fish and 4 people to produce 1 load of rum. Further, suppose a volcanic eruption on Montserrat forces many residents to abandon the country. After this eruption, only 4800 people remain on the island.
Draw the PPF for Montserrat. Show the impact of the volcanic eruption - show both the before and after PPF on the same graph. Put Fish on the vertical axis. Clearly label each intersection point.
1. Who has the absolute advantage in fish?
a. Anguilla
b. Montserrat
c. Anguilla before the volcano, Montserrat after
d. Montserrat before the volcano, Anguilla after
2. What is Anguilla's opportunity cost of 1 unit of fish (in rum)?
3. What is Anguilla's opportunity cost of 1 unit of rum (in fish)?
4. What is Montserrat's opportunity cost of 1 unit of fish (in rum) before the volcano?
5. What is Montserrat's opportunity cost of 1 unit of rum (in fish) after the volcano?
6. If the two countries want to both become better off, who should make rum and trade it for fish?
a. Anguilla
b. Montserrat
c. Anguilla before the volcano, Montserrat after
d. Montserrat before the volcano, Anguilla after
e. The two countries cannot profitably trade
f. The answer is ambiguous