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Macroeconomics

Paul Krugman, Robin Wells

Chapter 2

Economics Models: Trade-offs and Trade - all with Video Answers

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Chapter Questions

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Problem 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). 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 306 registered fishermen were to be employed by hotels (in addition to the 2,719 people already working in hotels), how many hotel stays could Bermuda produce?
b. If all 2,719 hotel employees were to become fishermen (in addition to the 306 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 2009.

Doris Bennett
Doris Bennett
Numerade Educator
01:49

Problem 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 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.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
27:14

Problem 3

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?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:46

Problem 4

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?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:32

Problem 5

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.
a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake?
b. If the EU and the United States continue to trade, what do you think will characterize the goods that the EU sells to the United States and the goods that the United States sells to the EU?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
02:27

Problem 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 baseball and two to basketball. The accompanying table gives each person's batting average and freethrow average.
a. Explain how you would use the concept of comparative advantage to allocate the players. Begin by establishing each player's opportunity cost of free throws in terms of batting average.
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?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
03:12

Problem 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 the land and labor to firms. Identify where in the flows of cowry shells or physical things (goods and services, or resources) each of the following impacts would occur. Describe how this impact spreads around the circle.
a. A devastating hurricane floods many of the potato fields.
b. A very productive fishing season yields a very large number of fish caught.
c. The inhabitants of Atlantis discover Shakira and spend several days a month at dancing festivals.

Majid Borumand
Majid Borumand
Numerade Educator
15:59

Problem 8

An economist might say that colleges and universities "produce" education, using faculty members and students as inputs. According to this line of reasoning, education is then "consumed" by households. Construct a circular-flow diagram to represent the sector of the economy devoted to college education: colleges and universities represent firms, and households both consume education and provide faculty and students to universities. What are the relevant markets in this diagram? What is being bought and sold in each direction? What would happen in the diagram if the government decided to subsidize $50 \%$ of all college students' tuition?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:06

Problem 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?
Yote: $\$ 15$
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?
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 earphones. 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?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
03:00

Problem 10

A representative of the American clothing industry recently made the following statement: "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?
b. Is the policy that is being advocated consistent with the preceding statements about the wages and productivities of American and Asian workers?
c. Would such a policy make some Americans better off without making any other Americans worse off? That is, would this policy be efficient from the viewpoint of all Americans?
could low-wage Asian workers benefit from or be hurt by such a policy?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:29

Problem 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.
b. "We should lower taxes to encourage more work" is a positive statement.
c. Economics cannot always be used to completely decide what society ought to do.
d. "The system of public education in this country generates greater benefits to society than the cost of running the system" is a normative statement.
e. All disagreements among economists are generated by the media.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:50

Problem 12

Evaluate the following statement: "It is easier to build an economic model that accurately reflects events that have already occurred than to build an economic model to forecast future events." Do you think this is true or not? Why? What does this imply about the difficulties of building good economic models?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:13

Problem 13

Economists who work for the government are often called on to make policy recommendations. Why do you think it is important for the public to be able to differentiate normative statements from positive statements in these recommendations?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
03:00

Problem 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 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?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:34

Problem 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 for divisive political debates, such as whether the government should provide free medical care for all."

Majid Borumand
Majid Borumand
Numerade Educator
10:15

Problem 16

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.
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?
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?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator