Geraldine Spinner

BU204-1

Unit 4- Midterm

January 9, 2011

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Atlantis is a small, isolated island in the South Atlantic. They grow potatoes and catches fish, given their limited resources and available technology, they use more of resources for potato production; there are fewer resources available for catching fish. Below is a graph describing their production possibilities! Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes?

Atlantis cannot produce 500 pounds of fish and 800 pounds of potatoes, because if they produce 500 pounds of fish, then the most potatoes they would be able to produce is 600 pounds. Therefore, this point would lie outside the production possibility frontier at point G.

The opportunity cost of increasing the annual output of potatoes from 600 to 800 would be 200 pounds of fish. So therefore, if Atlantis increases their output from 600 to 800 pounds of potatoes, it will have to cut the fish production from 500 to 300 pounds and that’s a difference of 200 pounds. If Atlantis would increase the output from 200 to 400 pounds of potatoes, they could only get 50 pounds of fish. The fish production is now 650 pounds, they would have to cut that to 600 pounds. We can see that the more potatoes Atlantis produce, the more the opportunity

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cost is, as you grow more potatoes, you have to use less land that would be suitable to do it. Because you have to divert more resources away from the fishing as more potatoes is grown, as a result you produce less fish. This implies that the production possibility frontier will become higher the more you move to the right.

Peter Pundit, an economics...