Background
Congratulations! You have just been elected Ultimate Authority and Superior Sovereign of the small island
nation of Atari. The position is such that, once elected, you serve for life. However, don't feel too secure in
your employment just yet, the average life expectancy of a UASS is about six months (the natives tend to be
very unforgiving of economic blunders).
In the hypothetical world of Atari there are only two goods, cloth (C) and vodka (V). These goods are produced
by the labor (L) of the native islanders according to the following production functions: (assume any capital or
raw materials needed to produce cloth or vodka are available in unlimited quantities)
C(L) = 2L
V(L) = 1.5 L
There are 30 equally productive natives who are able to work.
Stage 1
You should complete this stage with your teammates. Finish it by Wednesday at the latest.
Your first task is to determine your production possibilities. Complete the table in the attached Excel file,
determining the quantities of cloth and vodka that can be produced by the natives. (Put this in the area
shaded in blue). Then graph the production possibilities frontier putting vodka on the vertical axis and cloth on
the horizontal axis. (You can create your graph in Excel, or using other software, or just draw it by hand using
graph paper).
The island is run as a closed, centrally planned economy—and guess who's the central planner? Your job is to
tell the natives how much of each good to produce. Assume the natives have a well-behaved utility function
such that they prefer consuming equal amounts of cloth and vodka.
• The natives should produce \(26\) V and \(26\) C. 13 labor hours and 17 labor hours respectively.
• Mark this point on your production possibilities frontier graph. (You can manually annotate it.)
• What's the opportunity cost of vodka in your country? Of cloth?
• The opportunity cost for making only vodka is 60 cloth, The opportunity cost of making only Cloth is 45
Vodka.
