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2 Bermuda s actual production point. Question: Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch 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 Quantity of potatoes Quantity of fish output options (pounds) (pounds) A 1,000 0 B C D E F 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? 2

3 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 diagram. 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 potatoes, 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 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. 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.) Question: According to data from the U.S. Department of Agriculture s National Agricultural Statistics Service, 124 million acres of land in the United States were used for wheat or corn farming in Of those 124 million acres, farmers used 50 million acres to grow billion bushels of wheat and 74 million acres of land to grow billion bushels of corn. Suppose that U.S. wheat and corn farming is efficient in production. At that production point, the opportunity cost of producing one additional bushel of wheat is 1.7 fewer bushels of corn. However, farmers have increasing opportunity costs, so that additional bushels of wheat have an opportunity cost greater than 1.7 bushels of corn. For each of the following production points, decide whether that production point is (i) feasible and efficient in production, (ii) feasible but not efficient in production, (iii) not feasible, or (iv) unclear as to whether or not it is feasible. a. Farmers use 40 million acres of land to produce 1.8 billion bushels of wheat, and they use 60 million acres of land to produce 9 billion bushels of corn. The remaining 24 million acres are left unused. b. From their original production point, farmers transfer 40 million acres of land from corn to wheat production. They now produce billion bushels of wheat and bushels of corn. c. Farmers reduce their production of wheat to 2 billion bushels and increase their production of corn to billion bushels. Along the production possibility frontier, the opportunity cost of going from billion bushels of corn to billion bushels of corn is bushel of wheat per bushel of corn. a. This point is feasible but not efficient in production. Producing 1.8 billion bushels of wheat and 9 billion bushels of corn is less of both wheat and corn than is possible. They could produce more if all the available farmland were cultivated. b. At this new production point, farmers would now produce 1 billion more bushels of wheat and 1.7 billion fewer bushels of corn than at their original production point. This reflects an opportunity cost of 1.7 bushels of corn per additional bushel of wheat. But, in fact, this new production point is not feasible 3

6 c. Normative d. Positive e. Normative 6

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