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microeconomics book solution 2

microeconomics book solution 2 -...

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Solution Economic Models: Trade-offs and Trade 1. Two important industries on the island of Bermuda are fishing and tourism. According to data from the World Resources Institute and the Bermuda Department of Statistics, in the year 2000 the 307 registered fishermen in Bermuda caught 286 metric tons of marine fish. And the 3,409 people employed by hotels produced 538,000 hotel stays (measured by the number of visitor arrivals). Suppose that this production point is efficient in production. Assume also that the opportunity cost of one additional metric ton of fish is 2,000 hotel stays and that this opportunity cost is constant (the opportunity cost does not change). a. If all 307 registered fishermen were to be employed by hotels (in addition to the 3,409 people already working in hotels), how many hotel stays could Bermuda produce? b. If all 3,409 hotel employees were to become fishermen (in addition to the 307 fishermen already working in the fishing industry), how many metric tons of fish could Bermuda produce? c. Draw a production possibility frontier for Bermuda, with fish on the horizontal axis and hotel stays on the vertical axis, and label Bermuda’s actual production point for the year 2000. 1. a. Forgoing the production of 1 metric ton of fish allows Bermuda to produce 2,000 additional hotel stays. Therefore, forgoing the production of 286 metric tons of fish allows Bermuda to produce 2,000 × 286 = 572,000 additional hotel stays. If all fishermen worked in the hotel industry, Bermuda could produce 538,000 + 572,000 = 1,110,000 hotel stays. b. Forgoing the production of 2,000 hotel stays allows Bermuda to produce 1 addition- al metric ton of fish, so giving up 538,000 hotel stays allows Bermuda to produce 538,000/2,000 = 269 additional metric tons of fish. If all hotel employees worked in the fishing industry, Bermuda could produce 286 + 269 = 555 metric tons of fish. c. The accompanying diagram shows the production possibility frontier for Bermuda. Note that it is a straight line because the opportunity cost is constant. Point A is Bermuda’s actual production point. A 0 Quantity of hotel stays (thousands) Bermuda PPF Quantity of fish (metric tons) 1,110 538 286 555 S-11 2 chapter: S11-S22_Krugman2e_PS_Ch02.qxp 9/16/08 9:18 PM Page S-11
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Solution 2. Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow pota- toes and catch fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limit- ed resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish. 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.
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