When hurricane Katrina devastated the Gulf coast, the businesses in the area, ev
ID: 1226244 • Letter: W
Question
When hurricane Katrina devastated the Gulf coast, the businesses in the area, even those not physically damaged by the storm, had losses. Explain how this illustrates the principle that "one person's spending is another person's income." Economic Models: Trade-offs and Trade Use the following to answer questions that follow: What is the opportunity cost of increasing the production of crabs from zero to 100? What is the opportunity cost of increasing the production of crabs from 400 to 500? Explain the difference in your answers. The table shows the maximum annual output combinations of crabs and cakes. Given the scarce resources and limited technology, as Chesapeake uses more resources for the production of cakes, fewer resources are available to produce crabs. Can this nation produce 200 crabs and 500 cakes? Is this efficient? Explain.Explanation / Answer
1.c. There is a circular flow of income in the economy. Spending by some person will become income of the other because the sellers are also buyers. A worker employed by a firm is accounted as a cost to that firm because the firm has to pay him wages for his services rendered, for the firm his wages would be spending. However, for the worker this spending of the firm is his income.
Similarly, during hurricane, people lost their livlihoods and income is almost zero. Because of which spending is reduced and when that happens, sellers lose out because there is no buyer (seller's income is reduced). As a result, the sellers also lose out, as a consequence, because seller did not earn enough so he would not be in a position to spend and therefore his spending would fall.
2.a. Opportunity cost is defined as the cost of the next best alternative.
In order to produce 100 crabs, 50 units of cake needs to be given off.
Opportunity cost of producing 500 crabs is 250 cakes.
As the production of one good increases, the opportunity cost of producing the next unit also increases and this is known is increasing opportunity cost.
b. Yes this nation can produce a combination of 200 crabs and 500 cakes but this is not an efficient point of production because there is a capacity of producing 100 units of cake more with the same level of crab production.
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