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Economic Models:
Tradeoffs and Trade
chapter
2
1.
Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and
catch fresh fish. The accompanying table shows the maximum annual output combinations
of potatoes and fish that can be produced. Obviously, given their limited resources and
available technology, as they use more of their resources for potato production, there are
fewer resources available for catching fish.
P R O B L E M S
Maximum annual
Quantity of potatoes
Quantity of fish
output options
(pounds)
(pounds)
A
1,000
0
B
800
300
C
600
500
D
400
600
E
200
650
F
0
675
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a.
Draw a production possibility frontier illustrating these options, showing points
A
–
F
.
b.
Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. Where
would this point lie relative to the production possibility frontier?
c.
What is the opportunity cost of expanding the annual output of potatoes from 600 to
800 pounds?
d.
What is the opportunity cost of increasing the annual output of potatoes from 200 to
400 pounds?
e.
Can you explain why the answers to parts c and d are not the same? What does this
imply about the slope of the production possibility frontier?
2.
In the ancient country of Roma, only two goods, spaghetti and meatballs, were produced. There
were two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month could
produce either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no
spaghetti, or any combination in between, such as 15 pounds of spaghetti and 25 pounds of
meatballs. The Frivoli, by themselves, each month could produce 40 pounds of spaghetti and
no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in between,
such as 20 pounds of spaghetti and 15 pounds of meatballs.
a.
Assume that all production possibility frontiers are straight lines. Draw one diagram
showing the monthly production possibility frontier for the Tivoli and another showing
the monthly production possibility frontier for the Frivoli. Show how you calculated
them.
b.
Which tribe had the comparative advantage in spaghetti production? In meatball
production?
In
A
.
D
. 100 the Frivoli discovered a new technique for making meatballs that doubled the
quantity they could produce each month.
c.
Draw the new monthly production possibility frontier for the Frivoli.
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 Spring '08
 sheflin
 Economics, Macroeconomics, European Union, Positive statement, production possibility frontier, Frivoli

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