The Diomede Islands are located in the Bering Strait (a stretch of water), which separates mainland Russia
Question:
The Diomede Islands are located in the Bering Strait (a stretch of water), which separates mainland Russia and the state of Alaska (United States of America). The Diomede Islands are comprised of two individual islands which are separated by the International Date Line but located just two miles apart: Big Diomede (Russia) and Little Diomede (USA). Before 1867, both islands were populated with indigenous native people, and there was free travel between the two islands. Both islands have limited soil available for agriculture and year-round cold temperatures.
Consider the Diomede Islands before 1867 when there was free trade and travel between the islands. Little Diomede has better soil that allow Salmonberries, a type of fruit, to grow. Both islands have access to the same fish for hunting.
Below is a table that shows a fictional version of the production possibilities of both communities in a given year. Assume that the opportunity costs are constant (i.e. the feasible frontier for both islands is linear):
| If 100% of time is spent on the production of one good | Self sufficiency | ||
| Salmonberries (kg) | Fish (kg) | Salmonberries (kg) | Fish (kg) |
Little Diomede | 900 | 3000 | 600 | 1000 |
Big Diomede | 150 | 3000 | 50 | 2000 |
a.) Does either island have an absolute advantage in producing salmonberries or fish? Explain your answer. [1 point]
b.) Which island has the comparative advantage in producing salmonberries? Explain your answer by calculating the opportunity cost for producing salmonberries for both Big Diomede and Little Diomede. [2 points]
c.) Interpreting your answer to part (b), which goods should each island specialise in producing? [1 point]
d.) Calculate the gains/losses for each island (for both salmonberries and fish) when they switch from self-sufficiency to specialising in the good for which they have a comparative advantage. [1 point]
e.) What is the fair trading price if both islands specialise? Give your answer to 2 decimal places, if appropriate. [2 points]
f.) What is the only possible trade using this fair trading price in part (e) that Little Diomede would agree to if they wanted to have the same amount of fish as under self-sufficiency? Has specialisation increased total output if this trade takes place? Explain your answer. [2 points]
Intermediate Accounting Volume 1
ISBN: 9781260306743
7th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod Dick