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Krugman_SolMan_CH02

# Krugman_SolMan_CH02 - Solution Economic Models Trade-offs...

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Unformatted text preview: Solution Economic Models: Trade-offs and Trade 1. Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow pota- toes and catch fresh fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their lim- ited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish. chapter 2 9 a. Draw a production possibility frontier with potatoes on the horizontal axis and fish on the vertical axis 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 increasing 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? 1. a. The accompanying diagram shows the production possibility frontier for Atlantis. b. No, Atlantis cannot produce 500 pounds of fish and 800 pounds of potatoes. If it produces 500 pounds of fish, the most potatoes it can produce is 600 pounds. This point would lie outside the production possibility frontier, at point G on the dia- gram. 600 650 F E G D C B A Quantity of fish (pounds) Quantity of potatoes (pounds) 675 500 300 200 400 600 1,000 800 Maximum annual Quantity of potatoes Quantity of fish output options (pounds) (pounds) A 1,000 B 800 300 C 600 500 D 400 600 E 200 650 F 675 KrugmanMacro_SM_Ch02.qxp 10/19/05 3:45 PM Page 9 Solution c. The opportunity cost of increasing output from 600 to 800 pounds of potatoes is 200 pounds of fish. If Atlantis increases output from 600 to 800 pounds of pota- toes, it has to cut fish production from 500 pounds to 300 pounds, that is, by 200 pounds. d. The opportunity cost of increasing output from 200 to 400 pounds of potatoes is 50 pounds of fish. If Atlantis increases output from 200 to 400 pounds of potatoes, it has to cut fish production from 650 pounds to 600 pounds, that is, by 50 pounds. e. The answers to parts c and d imply that the more potatoes Atlantis produces, the higher the opportunity cost becomes. For instance, as you grow more and more po- tatoes, you have to use less and less suitable land to do so. As a result, you have to divert increasingly more resources away from fishing as you grow more potatoes, meaning that you can produce increasingly less fish. This implies, of course, that the production possibility frontier becomes steeper the farther you move along it to the right; that is, the production possibility frontier is bowed out. (Mathematicians call this shape concave .) 2. In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced....
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Krugman_SolMan_CH02 - Solution Economic Models Trade-offs...

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