Question

1. John and Paul are stranded on a deserted island where they survive by catching fish and picking coconuts. One day John can catch 8 fish OR pick 12 coconuts or he can divide his time between the two in any way with no loss of efficiency. So for instance, if he spends half of the day catching fish and a half picking coconuts, he can catch 4 fish AND 6 coconuts. Similarly, Paul can catch 6 fish or pick 3 coconuts in a day (and also divide time in any way between the two).

Draw a PPF for John and Paul. Label the slopes and intercepts. If they want to produce 4 fish between the two of them, what quantity of coconuts would be production efficient? label this point on your graph.

2. a. Show the market for potatoes on a graph and show what will happen if there is a drought in Idaho (where a lot of potatoes are grown).

b. On another graph, show what will happen in the market for potatoes if there is a drought in China (where, I presume, a lot of rice is grown).

Answer 1

(1) The diagram below demonstrates fish on X-axis and cocunuts on the Y-axis. If John catches only fish, he can catch 8 fish and hence, the horizonal intercept for John = 8. Similarly, if he produces only coconut, he can produce 12 and hence the vertical intercept is 12. Therefore, the PPF of John is represented by line JJ' with vertical intercept of 12 and horizintal intercept of 8. Similarly, Paul's PPF is represented by PP'.

Given the information, the opportunity cost of John and Paul are given below.

As highlighted in the table above, the opportunity cost of catching fish is lower for Paul, where as opportunity cost of producing coconut is lower for John.

In the diagram, the PPFs for John and Paul are aggregated to obtain the overall PPF as ABC, with a kink at B. All the points on ABC represent efficient level of production. As required, if 4 fish to be cought, Paul should devote his to catch fish as he has the lowest opportunity cost of catching fish. After catching 4 fishes, he still has sometime left (equivalent to 6 - 4 = 2 fish), which he can utilize to produce coconut. The opportunity cost of 1 fish = 0.5 coconut. Hence, opportunity cost of 2 fishes = 0.5 * 2 = 1 coconut. In other words, in addition to 4 fish, he can produce 1 coconut. Additionally, John will utilise all his resources to produce coconuts and hence, he can produce 12 coconuts. There fore, a total of 1 + 12 = 13 coconuts can be produced along with 4 fish. This point is shown as E in the diagram, which is on the overall PPF.

2 (a) The diagram below has D and S are the original demand and supply curves respectively, where P* and Q* are respective equilibrium price and quantity in Idaho. Since, lots of potatoes are grown in Idaho, due to draught, the production fails and it will impact the supply of potatos. That is supply will decrease because of draught. This will result in a left wardmovement of supply curve from S to S' as shown in the diagram below. Hence, the equlibrium price will increase and equilbrium quantity will fall.

(b) In China, where potato is not grown in a large scale rather rice is grown, the drought will not impact the supply side in the potati market, rather, it may impact the demand side in the potato maket. I think, demand will be reduced and hence the demand curve will shoft to left from Qd to Qd' as shown in the diagram below. Hence, both equilibrium price and quantity of potato will fall in China.