Reference no: EM132593130

John and Diane are the only two people living on a desert island. They have two sources of food, hunting rabbits and fishing. For each hour John spends hunting, he is able to catch one rabbit. For each hour he spends fishing, he can catch two fish. For each hour Diane spends hunting, she is able to catch two rabbits and for each hour fishing, she can catch two fish. (Assume each person spends 8 hours a day hunting or fishing.)

Your response should include the following:

1. A graph illustrating the production possibilities frontier for John and for Diane. You can draw a graph by hand or use a program such as Excel, Word, or PowerPoint, to draw your graph. Be sure to label your axes and provide sufficient information in the title to explain what your graph shows.
2. Explain your observations about the graphs and their implications in a sentence or two. 
3. Explain John's opportunity cost for catching a rabbit and Diane's opportunity cost.
4. Identify the presence of absolute advantage, if any.
5. Explain John's comparative advantage and Diane's comparative advantage. 
6. Identify the direction of trade if John and Diane decide to engage in exchange.
7. Assume that John and Diane each want to consume 6 rabbits. If no trade takes place, how much will each produce (number of rabbits, number of fish) and what is their combined output? If they engage in trade, what is their potential combined output?
8. Describe the potential gains from trade in terms of number of fish.