In ancient days a tribe of natives on the mythical continent of Atlantis was able to produce two commodities to eat. They could harvest fish from the sea and they could grow a form of wild oats. Table 1.a. and Graph 1.a. both show the maximum annual output combinations of fish and wild oats that could be produced by the natives of Atlantis.
In ancient days a tribe of natives on the mythical continent of Atlantis was able to produce two commodities to eat. They could harvest fish from the sea and they could grow a form of wild oats. Table 1.a. and Graph 1.a. both show the maximum annual output combinations of fish and wild oats that could be produced by the natives of Atlantis.
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Table 1.a.
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Maximum annual output options
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Kilograms of fish
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Bushels of wild oats
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1
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7,000
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0
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2
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6,000
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300
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3
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5,000
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500
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4
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4,000
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625
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5
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3,000
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710
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6
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2,000
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775
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7
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1,000
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825
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8
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0
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850
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- Could the Atlantis tribe have produced 800 bushels of wild oats and 5,000 kilograms of fish at the same time? Explain your answer. Where would this point lie relative to the production possibility frontier?
According to the given chart it will not be possible for the Atlantis tribe to produce 5,000 kilograms of fish along with the production of 800 bushels of oats. Considering, the theory of Production Possibility Frontier (PPF), if there is rise in production of one good, then the production of the other good will fall (Holtz – Eakin & Lovely, 2017). Considering the given graph 1.a. producing 5,000 kilograms of fish along with 800 bushels of wild oats is unachievable owing to the fact that stated point will lie outside the PPF. However, it will force the tribe to enhance their resource and technology constraint, where they could be able to produce the desired amount of fish and bushels.
- Using Table 1.a., what would have been the marginal opportunity cost of increasing the annual output of wild oats by 200 bushels, from 300 bushels up to 500 bushels?
Increasing the output of the wild oats, Atlantis tribe will be giving up some amount of production of fish, which will be the Marginal Opportunity Cost (MOC) of enhancing bushels production.
MOC of enhancing the bushels output = Sacrifice/Gain
= (6000-5000)/200
= 1000/200
= 5
Therefore, the tribe has to give up 5 kg of fish for every unit of wild oats, which is the MOC of increasing the production.
- Using Table 1.a., what would have been the marginal opportunity cost of increasing the annual output of wild oats by 200 bushels, from 625 bushels up to 825 bushels?
According the table 1.a. if the Atlantis tribe enhances the production of wild oats by 200 bushels, then they have to go out (4000 – 1000) kg = 3000 kg of fish.
Therefore MOC of enhancing wild oats annual output is = 3000/200
= 15 kg
Thus, the tribe has to give up 15 kg of fish for every unit of wild oats, which is the MOC of increasing the annual production.
- Why are the marginal opportunity costs for two similar batches of 200 bushels of wild oats not the same? Explain. What does this difference imply about the shape of the Atlantis tribe’s production possibility frontier curve?
Difference in the MOC in different cases mainly occurs due to the variation in the amount of fish production. Given PPF highlights that the Atlantis tribe is better in production of fish within the range of 625 and 825 compared to the wild oats production. Shape of the PPF illustrates Increasing Opportunity Cost, which entails if there is rise in production of one good, and then the tribe has to sacrifice the other good in large amount (Folland, Goodman & Stano, 2016). With steeper PPF within the range of 625 and 825 compared to the 300 and 500, difference in MOC of these two points arises.
- In the neighboring groups of New Yorkers and New Jersians, each produces only two products, bagels and calzones. By themselves, the New Yorkers, each day, can produce either 45 pounds of bagels and no calzones, or 30 pounds of calzones and no bagels, or any combination in between. The New Jersians, by themselves, each day, can produce 30 pounds of bagels and no calzones, or 28 pounds of calzones and no bagels, or any combination in between. Diagram 1.a. shows the daily Production Possibility Frontier for the New Yorkers and Diagram 1.b. shows the daily Production Possibility Frontier for the New Jersians.
- Examine diagram 1.a. showing the daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group has the absolute advantagein bagels production? Show your calculations and explain why.
Marginal Opportunity Cost
According to the Hanson, Lind & Muendler, (2015), state which has absolute advantage, it can produce higher amount of a good compared to its rivals utilizing same quantity of resources. Considering the 1.a. it can be seen that New Yorkers’ have absolute advantage when it comes to production of bagels.
New Yorkers’ = 45-30
= 15
New Jersey’s = 30-28
= 2
Therefore, utilizing same input, New Yorker’s can produce higher amount of bagels compared to the New Jersey’s.
- Examine diagram 1.a. showing the daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group has the absolute advantagein calzones production? Show your calculations and explain why.
New Yorkers’ = 30 - 45
= - 15
New Jersey’s = 28 - 30
= - 2
Therefore, New Jersey has absolute advantage in production of calzones due to the fact that it requires less number of inputs in order to producing almost same amount of output as New Yorkers.
- Examine diagram 1.a. showing the daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group has the comparative advantagein calzones production? Show your calculations and explain why.
According to the theory of Mankiw, (2014), states which has lower opportunity cost faces comparative advantage in production. Considering the diagram 1.a. it can be seen that:
New Yorkers’ Opportunity cost = 45/30 = 1.5
New Jersians Opportunity cost = 30/28 = 1.07
It can be seen that New Jersians has lower amount of Opportunity cost, thus they have comparative advantage in production of calzone.
- Examine diagram 1.a. showing the daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group has the comparative advantagein bagels production? Show your calculations and explain why.
When it comes to production of bagels, then the opportunity cost of the two states is as follows:
New York = 30/45 = 0.67
New Jersey = 28/35 = 0.8
It can be seen that New Yorkers’ has lower amount of Opportunity cost, thus they have comparative advantage in production of calzone.
Later, the New Yorkers discover a new technology for making calzones that dramatically increases the quantity of calzones they can produce each day. Diagram 1.c. shows both the old and the new daily production possibility frontier for the New Yorkers. The New Yorkers, each day, can now produce either 45 pounds of bagels and no calzones, or 50 pounds of calzones and no bagels, or any combination in between. Diagram 1.c. shows both the old and the new daily Production Possibility Frontiers for the New Yorkers and Diagram 1.b. shows the unchanged daily Production Possibility Frontier for the New Jersians.
- Examine diagram 1.c. showing both the old and the new daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group NOW has the absolute advantagein bagels production? Show your calculations and explain why.
New Yorker’s = 45 - 50
= - 5
New Jersians = 30 - 28
= 2
Considering the condition, it can be stated that New Jesians faces absolute advantage in production of bagels because it has negative inputs while moving to point of 45 from 45.
- Examine diagram 1.c. showing both old and the new daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group NOW has the absolute advantagein calzones production? Show your calculations and explain why.
New Yorker’s = 28 - 30
Absolute and Comparative Advantage
= - 2
New Jersians = 50 – 45
= 5
It can be seen that New Yorkers’ has absolute advantage due to the fact that their cost of production is lower than the New Jersians.
- Examine diagram 1.c. showing both the old and the new daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group NOW has the comparative advantagein bagels production? Show your calculations and explain why this is important.
New Yorker’s = 28/30
= 0.8
New Jersians = 50/45
= 1.11
Considering the opportunity cost situation, it can be said that New Jersians can produce at lower cost, thus they have comparative advantage.
- Examine diagram 1.c. showing both old and the new daily Production Possibility Frontier for the New Yorkers and diagram 1.b. showing the daily Production Possibility Frontier for the New Jersians. Which group NOW has the comparative advantagein calzones production? Show your calculations and explain why this is important.
New Yorker’s = 45/50
= 0.9
New Jersians = 30/28
= 1.07
Owing to the opportunity cost situation, it can be stated that New Yorkers have comparative advantage because they face lowered amount of opportunity cost compared to the New Jersey.
- Suppose that the supply schedule of Brazilian Coffee beans is as follows:
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Price of Brazilian Coffee beans
(per pound)
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Quantity of Brazilian Coffee beans supplied
(pounds)
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$4.00
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6,000
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$3.50
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5,000
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$3.00
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4,000
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$2.50
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3,000
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$2.00
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2,000
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Suppose that Brazilian Coffee beans can be sold only in Brazil. The domestic Brazilian demand schedule for Brazilian Coffee beans is as follows:
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Price of Brazilian Coffee beans
(per pound)
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Brazilian Quantity of Brazilian Coffee beans demanded
(pounds)
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$4.00
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1,000
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$3.50
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2,500
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$3.00
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4,000
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$2.50
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5,000
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$2.00
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7,000
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Below is the graph of the domestic Supply and Demand (Graph 2.a.) for Brazilian Coffee beans. From the supply and demand schedules above, what are the equilibrium price and quantity of Brazilian Coffee beans?
Considering the Graph 2.a. and supply - demand schedule, it can be stated that:
Equilibrium price is of Coffee beans of Brazil is = $3.00
Equilibrium quantity is of Coffee beans of Brazil is = 4,000 lbs
Now suppose that Brazilian Coffee beans can also be sold in Canada. The Canadian demand schedule for Brazilian Coffee beans is as follows:
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Price of Brazilian Coffee beans
(per pound)
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Canadian Quantity of Brazilian Coffee beans demanded
(pounds)
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$4.00
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1,000
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$3.50
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2,500
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$3.00
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3,000
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$2.50
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5,000
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$2.00
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5,500
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Complete the following table by inserting the total Brazilian Coffee beans demanded by both the Brazilians and Canadians at each price (the combined (total) demand schedule for Brazilian Coffee beans).
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Price of Brazilian Coffee beans
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Canadian Quantity of Brazilian Coffee beans demanded
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Brazilian Quantity of Brazilian Coffee beans demanded
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Total Brazilian Coffee Demanded
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(per pound)
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(pounds)
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(pounds)
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(pounds)
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$4.00
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1,000
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1,000
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2,000
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$3.50
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2,500
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2,500
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5,000
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$3.00
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3,000
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4,000
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7,000
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$2.50
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5,000
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5,000
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10,000
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$2.00
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5,500
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7,000
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12,500
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Below is the new Supply and Demand graph (Graph 2.b.) that illustrates the equilibrium price and quantity of Brazilian Coffee beans.
From the supply schedule and the combined Canadian and Brazilian demand schedule, what will be the new price at which Brazilian coffee growers can sell Brazilian Coffee beans?
Equilibrium price is decided where the demand and supply equates with each other (Azevedo & Leshno, 2016). Considering the Graph 2.b. it can be stated that new price is $3.50 at which coffee growers of the Brazil can sell the Brazilian Coffee beans.
With the Brazilian coffee growers selling to both the Canadians and the Brazilians, what price will be paid by Brazilian consumers?
Coffee growers of the Brazil are selling both in the Brazilian and Canadian market, which will lead to rise in price.
The new selling price of coffee is = $3.50
With the Brazilian coffee growers selling to both the Canadians and the Brazilians, what will be the quantity consumed by Brazilian consumers?
Coffee from Brazil is being sold both in the Brazilian and Canadian market; however the quantity of coffee consumed by the Brazilian consumers will remain same.
Therefore, the Brazilians will continue to consume 4000 units of coffee beans.
References:
Azevedo, E. M., & Leshno, J. D. (2016). A supply and demand framework for two-sided matching markets. Journal of Political Economy, 124(5), 1235-1268.
Folland, S., Goodman, A. C., & Stano, M. (2016). The Economics of Health and Health Care: Pearson International Edition. Routledge.
Hanson, G. H., Lind, N., & Muendler, M. A. (2015). The dynamics of comparative advantage (No. w21753). National bureau of economic research.
Holtz-Eakin, D., & Lovely, M. E. (2017). Scale economies, returns to variety, and the productivity of public infrastructure. In International Economic Integration and Domestic Performance (pp. 73-91).
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
