Steve and Lee Have Been Shipwrecked on a Deserted Island

question 7

Essay

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?
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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?
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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?

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Definitions:

Franchises

Business models where individuals can buy the rights to open and operate a location of a larger company.

Capital Intensive

A characteristic of businesses that require large investments in capital assets, like machinery and equipment, to produce goods or services.

Labor Intensive

Describes a process or industry that requires a large amount of labor to produce its goods or services, compared to the amount of capital used.

Manufacturing Businesses

Companies engaged in the conversion of raw materials into finished products through the use of machinery and labor, often at a large scale.