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BU204_03_Johnson_Jennifer_Mid-Term

# BU204_03_Johnson_Jennifer_Mid-Term - Jennifer Johnson...

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Jennifer Johnson Kaplan University BU204- 03 Macroeconomics Anthony Brogna Unit 4 November 7, 2010

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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. Maximum annual output options Quantity of potatoes Quantity of fish (pounds) (pounds) A 1,000 0 B 800 300 C 600 500 D 400 600 E 200 650 F 0 675 a. Examine the Maximum annual output options table above and the resulting Production Possibility Frontier Graph below and answer parts b - f. Production Possibility Frontier Graph b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? (5 points ) Explain. (5 points ) 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.
c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? (5 points ) 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 potatoes, it has to cut fish production from 500 pounds to 300 pounds, that is, by 200 pounds. d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds? (5 points ) 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. Can you explain why the answers to parts c and d are not the same? (20 points ) The answers to opportunity cost of increasing in question c and d imply that the more potatoes Atlantis produces, the higher the opportunity cost becomes. For instance, as you grow more and more potatoes, 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. f. What does this imply about the slope of the production possibility frontier? (20 points ) 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. 2. Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the EU

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in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU.
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