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KW_Macro_Ch_02_End_of_Chapter_Problems

# KW_Macro_Ch_02_End_of_Chapter_Problems - chapter 2 >...

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>> Economic Models: Trade-offs 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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