BU204_02 _Barnes_Charity_ Unit4 - Unit 4[BU204 |...

Unit 4
[ BU204 | Macroeconomics ]
Macroeconomics: Unit 4 Midterm
BU204-02
By: Charity Barnes
April 13, 2011
1

Unit 4
[ BU204 | Macroeconomics ]
Questions:
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.
2

Unit 4
[ BU204 | Macroeconomics ]
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 lbs. of fish and 800 lbs. of potatoes because there are not enough
resources to increase the production of potatoes. If Atlantis produces 500 lbs. of fish, the most
potatoes that can be produces would be 600 lbs.
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 the annual output of potatoes from 600 to 800 lbs. is 200 lbs. of
fish. If Atlantis increases the output of potatoes to 800 lbs. then it would have to cut fish production
down to 300 lbs.
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 the annual output of potatoes from 200 to 400 lbs. is 50 lbs. of fish.
If Atlantis increases the output of potatoes from 200 to 400 lbs then it would have to decrease fish
production from 650 to 600 lbs.
3

Unit 4
[ BU204 | Macroeconomics ]
e. Can you explain why the answers to parts c and d are not the same?
The answers to part C and D are different due to increasing opportunity cost. As more potatoes are
produced, more capital and labor must be used
.
(20 points )
f. What does this imply about the slope of the production possibility frontier?
If the X-axis and Y-axis were reversed and the fish was horizontal on the grid and potatoes were
vertical, the slope would bow inwards rather than outwards. (20 points )
4

Unit 4
[ BU204 | Macroeconomics ]
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 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.