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Solution
1. Two important industries on the island of Bermuda are fishing and tourism.
According to data from the Food and Agriculture Organization of the United Nations
and the Bermuda Department of Statistics, in 2009 the 306 registered fishermen in
Bermuda caught 387 metric tons of marine fish. And the 2,719 people employed by
hotels produced 554,400 hotel stays (measured by the number of visitor arrivals).
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 387 metric tons of
fish allows Bermuda to produce 2,000 × 387 = 774,000 additional hotel stays. If
all fishermen worked in the hotel industry, Bermuda could produce
554,000 + 774,000 = 1,328,400 hotel stays.
Quantity of
hotel stays
(thousands)
1,328.4
S-11
2
CHAPTER
Economic Models:
Trade-offs and Trade
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Solution
2. 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 a recent year. Of those 124 million acres, farmers used 50 mil-
lion acres to grow 2.158 billion bushels of wheat and 74 million acres to grow 11.807
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 1 addi-
2. 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 pos-
sible. They could produce more if all the available farmland were cultivated.
than 1.7 bushels of corn.
c. This new production point is feasible and efficient in production. Along the pro-
3. In the ancient country of Roma, only two goods, spaghetti and meatballs, are pro-
duced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the
Tivoli each month can produce either 30 pounds of spaghetti and no meatballs,
or 50 pounds of meatballs and no spaghetti, or any combination in between. The
Frivoli, by themselves, each month can produce 40 pounds of spaghetti and no meat-
balls, or 30 pounds of meatballs and no spaghetti, or any combination in between.
a. Assume that all production possibility frontiers are straight lines. Draw one
S-12 CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE
Solution
3. a. The accompanying diagram shows the production possibility frontier for the Tivoli in
panel (a) and for the Frivoli as the line labeled “Original Frivoli PPF” in panel (b).
50
40
Quantity
of spaghetti
(pounds)
(a) Production possibility frontier
for the Tivoli
50
40
Quantity
of spaghetti
(pounds)
Original Frivoli PPF
(b) Production possibility frontier
for the Frivoli
The production possibility frontier for the Tivoli was calculated as follows: the
Tivoli can produce either 30 pounds of spaghetti and no meatballs, or they can
produce no spaghetti but 50 pounds of meatballs. That is, the opportunity cost
b. For the Tivoli, the opportunity cost of 1 pound of meatballs is
3
⁄
5
of a pound
of spaghetti. For the Frivoli, the opportunity cost of 1 pound of meatballs is
4
⁄
3
pounds of spaghetti. That is, the Tivoli have a comparative advantage in meatball
production because their opportunity cost is lower. For the Tivoli, the opportunity
cost of 1 pound of spaghetti is
5
⁄
3
pounds of meatballs. For the Frivoli, the oppor-
tunity cost of 1 pound of spaghetti is
3
⁄
4
pound of meatballs. That is, the Frivoli
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Solution
Solution
4. One July, the United States exported aircraft worth $1 billion to China and imported
aircraft worth only $19,000 from China. During the same month, however, the
United States imported $83 million worth of men’s trousers, slacks, and jeans from
China but exported only $8,000 worth of trousers, slacks, and jeans to China. Using
4. a. Since countries gain from specializing in production of the goods and services in
which they have a comparative advantage, the United States must have the com-
5. Peter Pundit, an economics reporter, states that the European Union (EU) is increas-
ing 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.
a. Do you think Peter Pundit is correct or not? If not, what do you think is the
source of his mistake?
5. a. Peter Pundit is not correct. He confuses absolute and comparative advantage. Even
if the EU had an absolute advantage over the United States in every product it pro-
6. You are in charge of allocating residents to your dormitory’s baseball and basketball
teams. You are down to the last four people, two of whom must be allocated to base-
ball and two to basketball. The accompanying table gives each person’s batting aver-
age and free - throw average.
S-14 CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE
Name Batting average Free-throw average
Kelley 70% 60%
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Solution
Solution
b. Why is it likely that the other basketball players will be unhappy about this
arrangement but the other baseball players will be satisfied? Nonetheless, why
would an economist say that this is an efficient way to allocate players for your
dormitory’s sports teams?
6. a. Let’s begin by establishing the opportunity cost of free throws for each player. If
you allocate Kelley to the basketball team, the team gains a player with a 60%
free - throw average and the baseball team loses a player with a 70% batting aver-
age. That is, the opportunity cost of allocating Kelley to the basketball team is
7
⁄
6
.
Similarly, Jackie’s opportunity cost of playing basketball is 1; Curt’s opportunity
7. The inhabitants of the fictional economy of Atlantis use money in the form of cowry
shells. Draw a circular-flow diagram showing households and firms. Firms produce
potatoes and fish, and households buy potatoes and fish. Households also provide
7. The accompanying diagram illustrates the circular flow for Atlantis.
Shells Shells
Households
CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE S-15
Solution
a. The flooding of the fields will destroy the potato crop. Destruction of the potato
crop reduces the flow of goods from firms to households: fewer potatoes produced
by firms now are sold to households. An implication, of course, is that fewer
cowry shells flow from households to firms as payment for the potatoes in the
8. An economist might say that colleges and universities “produce” education, using
faculty members and students as inputs. According to this line of reasoning, educa-
tion is then “consumed” by households. Construct a circular-flow diagram to repre-
8. The accompanying diagram shows the circular flow for the education sector.
Tuition
Salaries,
scholarships
Faculty,
students
Education
Households
Education
market
Academic job
market, market
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Solution
9. Your dormitory roommate plays loud music most of the time; you, however, would
prefer more peace and quiet. You suggest that she buy some earphones. She responds
that although she would be happy to use earphones, she has many other things that
she would prefer to spend her money on right now. You discuss this situation with a
friend who is an economics major. The following exchange takes place:
He: How much would it cost to buy earphones?
You: $15.
He: How much do you value having some peace and quiet for the rest of the semester?
You: $30.
He: It is efficient for you to buy the earphones and give them to your roommate. You gain
more than you lose; the benefit exceeds the cost. You should do that.
You: It just isn’t fair that I have to pay for the earphones when I’m not the one making
the noise.
a. Which parts of this conversation contain positive statements and which parts
contain normative statements?
9. a. “It is efficient for you to buy the earphones” is a positive statement (it is either
right or wrong); that is, it is about description. “You should do that” (that is,
buy the earphones) is strictly speaking a normative statement; that is, it is about
prescription (although you would find all economists agree that all trades that
10. A representative of the American clothing industry recently made the following state-
ment: “Workers in Asia often work in sweatshop conditions earning only pennies
an hour. American workers are more productive and as a result earn higher wages.
In order to preserve the dignity of the American workplace, the government should
enact legislation banning imports of low - wage Asian clothing.”
a. Which parts of this quote are positive statements? Which parts are normative
statements?
CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE S-17
Solution
Solution
10. a. The positive statements are:
■ workers in Asia . . . [are] earning only pennies an hour
■ American workers are more productive
■ American workers are more productive and as a result earn higher wages
11. Are the following statements true or false? Explain your answers.
a. “When people must pay higher taxes on their wage earnings, it reduces their
incentive to work” is a positive statement.
11. a. True. This is a positive statement. It has a factual answer; that is, it is either right
or wrong. There has been some debate about whether the statement is actually
true or false, but in principle there is only one answer.
b. False. This is a statement about what we should do, and this statement has no
clearly right or wrong answer. Your view will depend on whether you think
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Solution
Solution
Solution
12. Evaluate the following statement: “It is easier to build an economic model that accu-
rately reflects events that have already occurred than to build an economic model to
12. True. With hindsight it is easier to see the important features of the situation that
a model should have captured. For predictive purposes, a model needs to anticipate
13. Economists who work for the government are often called on to make policy recom-
mendations. Why do you think it is important for the public to be able to differenti-
ate normative statements from positive statements in these recommendations?
13. Positive statements are those based on fact—or at least on our best estimate of what
the facts are. Therefore, these statements are also those that do not depend on the
14. The mayor of Gotham City, worried about a potential epidemic of deadly influenza
this winter, asks an economic adviser the following series of questions. Determine
whether a question requires the economic adviser to make a positive assessment or a
normative assessment.
a. How much vaccine will be in stock in the city by the end of November?
b. If we offer to pay 10% more per dose to the pharmaceutical companies providing
14. a. Positive
b. Positive
15. Assess the following statement: “If economists just had enough data, they could solve
all policy questions in a way that maximizes the social good. There would be no need
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Solution
Solution
15. What is true is that if economists had enough data, they could predict precisely
what the outcome would be of any proposed policy (such as free medical care). That
16. 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 lim-
ited resources and available technology, as they use more of their resources for potato
production, there are fewer resources available for catching fish.
16. a. The accompanying diagram shows the production possibility frontier for Atlantis.
600
650
FE
D
Quantity
of fish
(pounds)
675
S-20 CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE
Maximum annual Quantity of potatoes Quantity of fish
output options (pounds) (pounds)
A 1,000 0
B 800 300
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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 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 pota-
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