1. Assume that world consists of two islands that both produce coconut's and water. Explain the concept of comparative advantage. In addition, using the following information to calculate the opportunity costs of producing each good in each island. Finally, what is the minimum willingness to accept (WTA) to produce each good and what would the maximum willingness to pay (WTP) be of each good? (12 Points)

Production Per Hour

Home

Foreign

Water

12

7

Coconuts

4

5

1. Assume that it takes 12 minutes to transport the good to the market for the other island residents to purchase it, you can transport 8 coconuts at a time, and the market price of a coconut is 2 water. Calculate the opportunity cost of transporting coconut's in terms of water (use the market price). Will trade still occur? (8 Points)

1. Assume that a third individual shows up on the exporting island (lives on the exporting island) and has faster boats and wagons for transporting goods on and off the boats. This individual can transport 80 coconuts in 6 minutes between the production market and consumer market. Calculate the final price per unit including outsourcing the transportation. (8 Points)
2. Assume that another individual arrives at the exporting island and brings specialized machinery that allows them to produce 60 coconuts per hour. Further, assume that the hourly wage is 10 water per hour and the capital cost is 5 water per hour. Assuming the firm sells at the average cost of production, what is the final market price at the factory? (15 Points)