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1. Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fresh 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 Quantity of fish
(pounds) (pounds)
A 1,000 0
B 800 300
C 600 500
D 400 600
E 200 650
F 0 675

a. Examine the Maximum annual output options table above and the resulting Production Possibility Frontier Graph below and answer parts b - f.

Production Possibility Frontier Graph
[pic]

b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? A) No, the reason for this is resource limitations.

c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds? A) The opportunity cost in increasing the output is 200 pounds of potatoes.

d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds? A) The opportunity cost in increasing potatoes from 200 to 400 pounds is 50 pounds of fish

e. Can you explain why the answers to parts c and d are not the same? A) The answers to parts c and d are not the same due to the increase in production cost for each of the operations. If you increase fish production you lose some of the potato production by, moving bodies and equipment to help with production.

f. What does this imply about the slope of the production possibility frontier? A) This shows that the further you move to the right the steeper the slope becomes.

2. 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?

A) He is not correct, as he is confusing the absolute and comparative advantages

b. If the EU and the United States continue to trade what do you think will characterize the goods that the EU exports to the United States and the goods that the United States exports to the EU?

A) The United states and the EU will both continue to export goods of comparative advantage from both countries.

3. Suppose that the supply schedule of Maine lobsters is as follows:

Price of lobster Quantity of lobster supplied

(per pound) (pounds)

$ 25 800

$ 20 700

$ 15 600

$ 10 500

$ 5 400

Suppose that Maine lobsters can be sold only in the United States. The U.S. demand schedule for Maine lobsters is as follows:

Price of lobster Quantity of lobster demanded

(per pound) (pounds)

$ 25 200

$ 20 400

$ 15 600

$ 10 800

$ 5 1,000

a. Looking at both the schedules of supply and demand, as well as the graph of the demand and supply curve for Maine Lobsters, what is the equilibrium price of lobsters and the equilibrium quantity of lobsters demanded and supplied at that price? (5 points)

[pic]

b. Now, suppose that Maine lobsters can also be sold in France. The French demand schedule for Maine lobsters is as follows:

Price of lobster Quantity of lobster demanded

(per pound) (pounds)

$ 25 100

$ 20 300

$ 15 500

$ 10 700

$ 5 900

What is the demand schedule for Maine lobsters now that French consumers can also buy them? (5 points)

c. Using the combined Us and...
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