3. Assume a desert island economy in which labor is the only scarce resource and

Question

3. Assume a desert island economy in which labor is the only scarce resource and labor can be used to gather food (coconuts) or to build huts. There are six equally productive individuals on the island. Each inhabitant can gather 25 coconuts in one day or build one hut in one day.

a. Does this production possibilities schedule exhibit constant or increasing opportunity costs? _______________

b. Suppose the workers on the island are currently making two huts along with their work collecting coconuts. Compute the opportunity cost of building one (1) more (i.e. an additional) hut in one day. ___________

c. If half the workers build huts and half the workers gather coconuts, what would be the production of the island? Number of coconuts_________ Number of huts __________

d. Assume that in one day, two huts were built and 75 coconuts were gathered. What does this situation depict? (I.e. what might cause this result to occur on the island?)

e. What would have to occur on the island for three huts to be produced along with 100 coconuts? I.e. what would be true about the resource use?

Explanation / Answer

a) This production possibility schedule exhibit constant return to scale because when the labor switch or a single labor is used for another task his productivity doesn't fall.

b) The opportunity cost of building one more hut is 25 coconuts which the labor will not be able to collect.

c) Total output will be 75 coconuts and 3 huts.

d) This situation depicts that one worker is not working and the production is inefficient.

e) An increase in the labor can only enable the island to produce 3 huts and 100 coconuts in a day. They will need one extra labor.

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