Question 15
15. In October 2015, Hurricane Joaquin caused massive destruction to North and South Carolina,
New York, and Florida. Catastrophic flooding occurred with hundreds of people requiring
rescue, 25 killed, and estimated damage of $12 billion. Even those who weren’t directly
affected by the destruction were hurt because businesses and jobs dried up. Using one of the
principles of economy-wide interaction, explain how government intervention can help in
this situation.
Solution 15
Question 16
16. During the Great Depression, food was left to rot in the fields or fields that had once been
actively cultivated were left fallow. Use one of the principles of economy-wide interaction to
explain why.
Solution 16
Question 17
17. 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 2014 the 315 registered fishermen in Bermuda caught 497 metric
tons of marine fish. And the 2,446 people employed by hotels produced 580,209 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 1 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 315 registered fishermen were to be employed by hotels (in addition to the 2,446
people already working in hotels), how many hotel stays could Bermuda produce?
b. If all 2,446 hotel employees were to become fishermen (in addition to the 315 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
2014.
Solution 17
Question 18
18. 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 million 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 additional bushel of wheat is 1.7 fewer bushels of corn.
However, because farmers have increasing opportunity costs, 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 3.158 billion bushels of wheat and 10.107 bushels of
corn.
c. Farmers reduce their production of wheat to 2 billion bushels and increase their production
of corn to 12.044 billion bushels. Along the production possibility frontier, the opportunity
cost of going from 11.807 billion bushels of corn to 12.044 billion bushels of corn is 0.666
bushel of wheat per bushel of corn.
Solution 18
Question 19
19. In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced.
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 meatballs, 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 diagram
showing the monthly production possibility frontier for the Tivoli and another showing the
monthly production possibility frontier for the Frivoli. Show how you calculated them.
b. Which tribe has the comparative advantage in spaghetti production? In meatball
production?
In A.D. 100 the Frivoli discover a new technique for making meatballs that doubles the
quantity of meatballs they can produce each month.
c. Draw the new monthly production possibility frontier for the Frivoli.
d. After the innovation, which tribe now has an absolute advantage in producing meatballs? In
producing spaghetti? Which has the comparative advantage in meatball production? In
spaghetti production?
Solution 19
Question 20
20. One July, the United States sold aircraft worth $1 billion to China and bought aircraft worth
only $19,000 from China. During the same month, however, the United States bought $83
million worth of men’s trousers, slacks, and jeans from China but sold only $8,000 worth of
trousers, slacks, and jeans to China. Using what you have learned about how trade is
determined by comparative advantage, answer the following questions.
a. Which country has the comparative advantage in aircraft production? In production of
trousers, slacks, and jeans?
b. Can you determine which country has the absolute advantage in aircraft production? In
production of trousers, slacks, and jeans?
Solution 20
Question 21
21. Your dormitory roommate plays loud music most of the time; you, however, would prefer
more peace and quiet. You suggest that she buy some headphones. She responds that although
she would be happy to use headphones, 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 headphones?
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 headphones 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 headphones when I’m not the one making the
noise.
a. Which parts of this conversation contain positive statements and which parts contain
normative statements?
b. Construct an argument supporting your viewpoint that your roommate should be the one to
change her behavior. Similarly, construct an argument from the viewpoint of your
roommate that you should be the one to buy the headphones. If your dormitory has a policy
that gives residents the unlimited right to play music, whose argument is likely to win? If
your dormitory has a rule that a person must stop playing music whenever a roommate
complains, whose argument is likely to win?
Solution 21
Question 22
22. 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 the
vaccines, will they provide additional doses?
c. If there is a shortage of vaccine in the city, whom should we vaccinate first—the elderly or
the very young? (Assume that a person from one group has an equal likelihood of dying
from influenza as a person from the other group.)
d. If the city charges $25 per shot, how many people will pay?
e. If the city charges $25 per shot, it will make a profit of $10 per shot, money that can go to
pay for inoculating poor people. Should the city engage in such a scheme?
Solution 22
Question 23
WORK IT OUT Interactive step-by-step help with solving this problem can be found
online.
23. 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
output options
Quantity of
potatoes
(pounds)
A
1,000
B
800
C
600
D
400
E
200
F
0
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?
Solution 23