solve Problem $16-03$

Alpha and Beta, two tiny islands in the Pacific, produce pearls and pineapples. The production$-$possibilities schedules in the table below describe their potential output in tons per year.

Instructions: Enter your responses as a whole number.

a$.$ Based on comparative advantage, which good should each island specialize in producing?

Alpha should specialize in producing

Beta should specialize in producing

b$.$ Suppose Alpha produced $6$ tons of pearls and $15$ tons of pineapples and Beta produced $30$ tons of pearls and $8$ tons of pineapples before they decided to trade. Assume that the two islands agree to specialize and trade and that the terms of trade will be $1$ ton of pineapples for $1$ ton of pearls. Trade soon results in an exchange of $10$ tons of pineapples for $10$ tons of pearls. Assume that the two countries specialize just enough to maintain their consumption of the item they export.

How much would each island produce after trade became possible?

Alpha would produce

tons of pearls and

$\backslash (\backslash$boldsymbol$\{\backslash$sigma$\}\backslash )$ tons of pineapples.

Beta would produce

tons of pearls and

tons of pineapples.

c$.$ The combined production for the two islands would increase by

$*$ tons of pearls and

tons of pineapples.

d$.$ How could both islands produce and consume even more?

World output and thus the potential gains from trade will be maximized when each island produces according to its:

absolute advantage.

domestic demand.

comparative advantage.