SOLUTION MANUAL FOR MACROECONOMICS 4TH EDITION

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CHAPTER

Economic Models:
Trade-offs and Trade 2

1. Two important industries on the island of Bermuda are fishing and tourism.
According to data from the Food and Agriculture Organization of the United Nations
and the Bermuda Department of Statistics, in 2009 the 306 registered fishermen in
Bermuda caught 387 metric tons of marine fish. And the 2,719 people employed by
hotels produced 554,400 hotel stays (measured by the number of visitor arrivals).
Suppose that this production point is efficient in production. Assume also that the
opportunity cost of 1 additional metric ton of fish is 2,000 hotel stays and that this
opportunity cost is constant (the opportunity cost does not change).
a. If all 306 registered fishermen were to be employed by hotels (in addition to the
2,719 people already working in hotels), how many hotel stays could Bermuda
produce?
b. If all 2,719 hotel employees were to become fishermen (in addition to the 306
fishermen already working in the fishing industry), how many metric tons of fish
could Bermuda produce?
c. Draw a production possibility frontier for Bermuda, with fish on the horizontal
axis and hotel stays on the vertical axis, and label Bermuda’s actual production
point for the year 2009.

S1o. lutio n
a. Forgoing the production of 1 metric ton of fish allows Bermuda to produce 2,000
additional hotel stays. Therefore, forgoing the production of 387 metric tons of
fish allows Bermuda to produce 2,000 × 387 = 774,000 additional hotel stays. If
all fishermen worked in the hotel industry, Bermuda could produce
554,000 + 774,000 = 1,328,400 hotel stays.
b. Forgoing the production of 2,000 hotel stays allows Bermuda to produce 1 addi-
tional metric ton of fish, so giving up 554,400 hotel stays allows Bermuda to produce
554,400/2,000 = 277.2 additional metric tons of fish. If all hotel employees worked in
the fishing industry, Bermuda could produce 387 + 277.2 = 664.2 metric tons of fish.
c. The accompanying diagram shows the production possibility frontier for Bermuda.
Note that it is a straight line because the opportunity cost is constant. Point A is
Bermuda’s actual production point.

Quantity of
hotel stays
(thousands)
1,328.4
 A
554.4

Bermuda
PPF

0 387 664.2
Quantity of fish (metric tons)

S-11

KrugWellsECPS4e_Micro_CH02.indd S-11 9/30/14 12:51 PM

 S-12 CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE

2. According to data from the U.S. Department of Agriculture’s National Agricultural

Statistics Service, 124 million acres of land in the United States were used for wheat
or corn farming in a recent year. Of those 124 million acres, farmers used 50 mil-
lion acres to grow 2.158 billion bushels of wheat and 74 million acres to grow 11.807
billion bushels of corn. Suppose that U.S. wheat and corn farming is efficient in
production. At that production point, the opportunity cost of producing 1 addi-
tional bushel of wheat is 1.7 fewer bushels of corn. However, because farmers have
increasing opportunity costs, additional bushels of wheat have an opportunity cost
greater than 1.7 bushels of corn. For each of the following production points, decide
whether that production point is (i) feasible and efficient in production, (ii) feasible
but not efficient in production, (iii) not feasible, or (iv) unclear as to whether or not
it is feasible.
a. Farmers use 40 million acres of land to produce 1.8 billion bushels of wheat,
and they use 60 million acres of land to produce 9 billion bushels of corn. The
remaining 24 million acres are left unused.
b. From their original production point, farmers transfer 40 million acres of land
from corn to wheat production. They now produce 3.158 billion bushels of wheat
and 10.107 bushels of corn.
c. Farmers reduce their production of wheat to 2 billion bushels and increase their
production of corn to 12.044 billion bushels. Along the production possibility
frontier, the opportunity cost of going from 11.807 billion bushels of corn to
12.044 billion bushels of corn is 0.666 bushel of wheat per bushel of corn.

S2o. luti oo int is feasible but not efficient in production. Producing 1.8 billion bushels
a. This po
of wheat and 9 billion bushels of corn is less of both wheat and corn than is pos-
sible. They could produce more if all the available farmland were cultivated.
b. At this new production point, farmers would now produce 1 billion more bush-
els of wheat and 1.7 billion fewer bushels of corn than at their original produc-
tion point. This reflects an opportunity cost of 1.7 bushels of corn per additional
bushel of wheat. But, in fact, this new production point is not feasible because we
know that opportunity costs are increasing. Starting from the original production
point, the opportunity cost of producing 1 more bushel of wheat must be higher
than 1.7 bushels of corn.
c. This new production point is feasible and efficient in production. Along the pro-
duction possibility frontier, the economy must forgo 0.666 bushel of wheat per
additional bushel of corn. So the increase in corn production from 11.807 billion
bushels to 12.044 billion bushels costs the economy (12.044 − 11.807) billion
bushels of corn × 0.666 bushel of wheat per bushel of corn = 0.158 bushel of
wheat. This is exactly equal to the actual loss in wheat output: the fall from 2.158
billion to 2 billion bushels of wheat.

3. In the ancient country of Roma, only two goods, spaghetti and meatballs, are pro-
duced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the
Tivoli each month can produce either 30 pounds of spaghetti and no meatballs,
or 50 pounds of meatballs and no spaghetti, or any combination in between. The
Frivoli, by themselves, each month can produce 40 pounds of spaghetti and no meat-
balls, or 30 pounds of meatballs and no spaghetti, or any combination in between.
a. Assume that all production possibility frontiers are straight lines. Draw one
diagram showing the monthly production possibility frontier for the Tivoli and
another showing the monthly production possibility frontier for the Frivoli. Show
how you calculated them.
b. Which tribe has the comparative advantage in spaghetti production? In meatball
production?

KrugWellsECPS4e_Micro_CH02.indd S-12 9/30/14 12:51 PM

 CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE S-13

In A.D. 100 the Frivoli discover a new technique for making meatballs that doubles
the quantity of meatballs they can produce each month.
c. Draw the new monthly production possibility frontier for the Frivoli.
d. After the innovation, which tribe now has an absolute advantage in producing
meatballs? In producing spaghetti? Which has the comparative advantage in meat-
ball production? In spaghetti production?

S3o. lut ion

a. The accompanying diagram shows the production possibility frontier for the Tivoli in
panel (a) and for the Frivoli as the line labeled “Original Frivoli PPF” in panel (b).

(a) Production possibility frontier (b) Production possibility frontier

for the Tivoli for the Frivoli
Quantity Quantity
of spaghetti of spaghetti

(pounds) (pounds) Original Frivoli PPF

50 50
40 40
30 30
New Frivoli PPF
20 20
10 10

0 10 20 30 40 50 60 0 10 20 30 40 50 60

Quantity of meatballs (pounds) Quantity of meatballs (pounds)

The production possibility frontier for the Tivoli was calculated as follows: the
Tivoli can produce either 30 pounds of spaghetti and no meatballs, or they can
produce no spaghetti but 50 pounds of meatballs. That is, the opportunity cost
of 1 pound of meatballs is 3⁄5 of a pound of spaghetti: in order to produce 1 more
pound of meatballs, the Tivoli have to give up 3⁄5 of a pound of spaghetti. This
means that the slope of their production possibility frontier is −3⁄5. A similar
argument for the Frivoli shows that their production possibility frontier has a
slope of −4 ⁄ 3.
b. For the Tivoli, the opportunity cost of 1 pound of meatballs is 3⁄5 of a pound
of spaghetti. For the Frivoli, the opportunity cost of 1 pound of meatballs is 4 ⁄ 3
pounds of spaghetti. That is, the Tivoli have a comparative advantage in meatball
production because their opportunity cost is lower. For the Tivoli, the opportunity
cost of 1 pound of spaghetti is 5⁄3 pounds of meatballs. For the Frivoli, the oppor-
tunity cost of 1 pound of spaghetti is 3 ⁄4 pound of meatballs. That is, the Frivoli
have a comparative advantage in spaghetti production because their opportunity
cost is lower.
c. The Frivoli’s new production possibility frontier is the line labeled “New Frivoli
PPF” in panel (b) of the diagram. Instead of producing 30 pounds of meatballs (if
they produce no spaghetti), they can now produce 60 pounds.
d. Now the Frivoli have the absolute advantage in both meatball production and spa-
ghetti production. The Frivoli’s opportunity cost of meatballs has now fallen to 4 ⁄6
= 2 ⁄3; that is, for each pound of meatballs that the Frivoli now produce, they have
to give up producing 2 ⁄3 of a pound of spaghetti. Since the Frivoli’s opportunity
cost of meatballs (2 ⁄3) is still higher than the Tivoli’s (3 ⁄5), the Tivoli still have the
comparative advantage in meatball production. The Frivoli’s opportunity cost of
spaghetti is 3 ⁄2 pounds of meatballs and the Tivoli’s is 5⁄3 pounds of meatballs, so
the Frivoli have the comparative advantage in spaghetti production.
KrugWellsECPS4e_Micro_CH02.indd S-13 9/30/14 12:51 PM
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"What a beautiful specimen!" Gerry sighed with professional longing. "I
really think it wants to make friends. Doesn't it remind you of an
oversize Scotty pup sitting up to beg?"
Strike snorted.
"What an imagination! Looks more to me like—"
"Watch it!" came the sudden warning.
In the discussion, they had taken their eyes from the newcomer, and it
had seized the opportunity to move in. The center of its head opened to
reveal an enormous mouth, filled with hideous, slavering, black fangs.
Emitting an eerie whistling note, the Thing rushed savagely upon the
group, in a horridly blind fury.

Everyone scattered like flushed quail, and the hairy enemy, unable to
make quick turns, charged harmlessly through like a bull. Abandoning
all pretense, it turned and came sliding back in another silent, deadly
rush. Again, the castaways dodged aside.
"He has such an endearing way of showing his friendliness!" Strike
gibed at his fiancée.
But though there were elements of humor in being chased round and
round the space-boat, tiring muscles soon warned that the situation was
no joke.
"This can't go on indefinitely," Gerry finally gasped. "Someone'll slip, or
dodge a little too late. And if we retreat into the ship, it'll just mean a
siege. If that blasted Dacres had only left us a weapon—"
She might have been a lady Aladdin, speaking the magic formula, for the
lifeboat opened and Barrows, grinning uncertainly, tossed an improvised
contraption to Strike. It consisted of two scalpels, fastened with wires
from the control panel to a three-foot metal piece of weather-stripping
ripped from the doorsill, to form a spear.
"Best we could do on short notice," Barrows apologized, then retreated
precipitately, as the shaggy, faceless nemesis charged raveningly against
the closing porte.
As the Thing reeled back from the shock, Strike deftly moved in with his
crude weapon, slashing for the abdomen. The result was so completely
devastating that Strike was dumbfounded.
The razor-sharp little knives went in as if through butter, and when they
were withdrawn, a torrent of grayish fluid spouted forth almost endlessly,
as if the strange creature were filled with the stuff to the exclusion of any
kind of organs.
Eventually, the rank flood ceased, and the enemy collapsed like an empty
glove, dead. The victory was so absolute—the weird animal had been so
utterly ferocious, animated solely by the two emotions of cunning and
hate. It had been defeated so easily—that bewilderment took the place of
triumph. Everyone gathered round Strike and his trophy.
"Funny stuff," Kranz said, pointing to the great puddle of vital fluid, as
yet unaffected by the temperature. "Wonder what it is?"
"Must be anti-freeze," Gerry hazarded.
"Be interesting to examine the beast," Strike said slowly.
He and Kranz exchanged a long look and, by common consent, seized
the shrunken carcass and bore it into the lifeboat. They could rig up a
rough laboratory there, putter around for hours with the smelly corpse,
and be quite happy.
Kranz was a fiend for chemical analysis. He would sample the Styx as
Charon rowed him across. Gerry, whose interest in strange creatures was
confined to live ones with commercial value, shrugged it off. It was one
of the few times in her life she missed the point.
Seven times, Neptune's pale bulk popped over the horizon to make its
swift journey across the sky before Strike, smiling like a cat in a bird-
cage, invited Gerry into the lifeboat.
"Interesting beastie," he observed. "Skin as thin as paper, despite the
shaggy coat. No circulatory system. Somehow that mess of fluid takes
the place of blood—has corpuscles and things in it, too. Rudimentary
organs of some kind about where you'd expect to find eyes. In the
absence of a Latin scholar, we've named it Apod Shaggius—footless and
hairy. 'Shaggie' for short."
"That hardly accounts for the self-satisfied smile," Gerry said shrewdly.
Strike grinned wider.
"We analyzed the fluid," he said. "It's a chlorinated compound, as you
might expect—basically perchlorethylene."
"And so?"
"Kranz thinks it would be easy to convert the stuff, right inside the
creature's body, into hexachlorethane, without any immediate harm. Just
a few injections."
"Now there's a brilliant experiment!" Gerry simmered exasperatedly.
"And at a time like this, marooned at the outer extremities of the System,
our days numbered! Why, for heaven's sake?"
She still did not see the point, nor did any of the others except Kranz,
and Strike found perverse delight in that fact. Gerry had kept still about
Triton's peculiar balance of centrifugal and gravitational forces while she
wasn't sure.
He, too, would have his little mystery till he knew whether his
experiment was going to pan out.
The fact was, within a few hours, or days, Dacres would be returning to
see if his murder plot had worked, and to set the stage for the rescue
parties. The castaways would have one chance—and one only—to fight
for their lives. It had to be good. And anything, however unlikely, that
might give them an edge was well worth the effort.
"Never mind why," Strike urged. "Just be a good gal and help me out. All
we need is one of these Shaggies captured alive to work on. You can do
it. There's chloroform in the medical kit, and a rope that'd make a fine
lasso. And, anyhow, surely one little old monster couldn't faze the
inimitable Gerry Carlyle!"
Gerry choked back some very unladylike words.

CHAPTER V
Knockout
Came the day when Tommy Strike's stomach had butterflies in it. That
was not from hunger, although rations hadn't been generous. It was the
sensation that every fighter knows as the ring lights go on, and the house
darkens, and he awaits the bell for the first round.
They were all awaiting the bell now, tense and drawn-faced, as they hid
in the darkened lifeboat, ready for a bigger, more desperate fight than
any their prizefight pal, Kid McCray, had ever engaged in. Days of
anxious waiting were over. Miles above the tricky Neptunian satellite,
hovered The Ark, slowly descending, quartering in geometric pattern, as
the detectors sought the smaller craft.
Were they ready for battle? Strike wondered. Some crude knives and
knuckle-dusters had been made, and there had been some excitement
when they captured one of the weird-looking hairy creatures they called
Shaggies. Strike's enthusiasm for the experiment he and Kranz had
performed on the beast had waned.
It was admittedly a longshot, though even if it didn't succeed, they would
be no worse off than before. What it all boiled down to was an ambush.
Dacres and his mob would be expecting to find nine corpses, the result of
the murderous gravity. He was due for a shock.
It would be attacking proton-pistol-armed killers almost barehanded, but
they had the advantage of stunning surprise. And the captured Shaggie
just might help. It had been "doped up," as McCray expressed it, and
turned loose when The Ark had finally come into sight. Now it stood out
there, a blot on the landscape, surely one of Nature's mistakes.
Of course, the creature would inevitably attack any moving thing,
including unwary pirates, with vigor. But whether subsequent events
would conform with theory, was in the lap of the gods. And to them,
Strike, in the intensity of his desire to rectify what he felt to be his fault,
prayed fervently.
At length the time for wondering was over, for Dacres had finally located
the wreck and was bringing The Ark down in a swift plunge, to hover
lightly a few feet above the surface, balloon-like.
"They sure handle it sweet," someone muttered grudgingly.
"They ought to. They've had plenty of time to practise." That was
Baumstark.
"S-sh! They might hear us!"
Minutes ticked away, as the gangsters in The Ark made their routine
tests. Then the ship came to rest, the main porte slid open, and the entire
vicious mob stood in the big lock staring eagerly out. All wore gravity
clogs.
Strike recognized Dacres at once, taller than the others, and anger began
to seethe in his brain like an acid bath, ran like liquor through his veins.
He felt his companions stir in the grip of that emotion, as they peered
through pin-point peepholes. He could literally smell the hate as it
sweated out of their trembling bodies.
"Not yet. Not yet," Strike whispered restrainingly. "Watch."
It was an ancient movie—jerky action, but no accompanying sound.
Outside, the Shaggie was going through its familiar routine, sliding
closer and closer, as it believed itself unobserved, to the men in the lock
entrance, amazingly like an enormous friendly puppy, afraid of a kick,
but hoping for a bone.
One of the gangsters, completely taken in, snapped his fingers at the
creature invitingly. Then, inevitably following its fixed emotion-habit
pattern, the Shaggie plunged viciously into action. Its initial rush carried
it right into the air-lock.
A fearful tangle ensued.

Mouths popped open in soundless cries. Faces grimaced in sudden terror.

Dodging madly about, the men fought to retreat into the main corridor of
The Ark.
The Shaggie's second blind, slavering rush took it right along with them,
and someone went down. There was a nasty moment before a proton bolt
blasted the Shaggie quite literally to bits, flooding the passageway with
its evil-smelling, vital fluid.
"This is it!"
Strike's voice was suddenly sharp and triumphant. A spate of grimly
vengeful men, with Kid McCray in the lead, poured from the lifeboat and
ran toward The Ark. Finely trained fighting men that they were, they
didn't even pause at the astounding sight that met their eyes. From out of
The Ark's open porte came billow after billow of dense white smoke. It
was as if the entire ship's interior had suddenly begun to burn.
As the crew dashed across the short intervening space—they had left off
their pressure suits for sake of freedom of action—Strike breathlessly
explained in triumph:
"The smoke's harmless! Don't be afraid! Hexachlorethane in the Shaggie
reacts vigorously with metallic zinc in the zincal floor and forms zinc
chloride. Reaction liberates such great heat that the zinc chloride is
immediately evaporated, and a dense cloud o' white smoke is generated!"
As Strike fought for breath, he saw the man called Monk stagger out of
the blinding smoke into view, squarely in the path of the charging
McCray. Without even slowing, McCray let drive with a frightful blow, a
concentrate of days of fear and hunger and hate.
The blow caught the man squarely in the pit of the stomach, and through
a momentary thinning of the smoke, the astonished castaways saw Monk
go sailing clear through the air-lock and across the corridor to smash
sickeningly against the far wall.
The truth dawned instantly. The piratical gang had adjusted their clogs to
handle two-and-a-half Gs. Consequently, they were only flyweights now,
not having had time to discover the facts of the gravitational situation.
With a howl of pure joy, Strike plowed after McCray into the wild melee
that surged savagely through the white murk, throwing haymakers at
everything in reach. If he hit someone who was solid, he muttered
apologies and sought a new target. If his victim vanished from sight in
the smoke from a single punch, he eagerly followed it up.
The end of the battle was a foregone conclusion. Completely surprised
and disorganized, Dacres and his gang were overwhelmed. Only half
realizing they were being attacked by men supposedly flat, frozen
corpses, and not daring to use their guns for fear of hitting their own
comrades, they were scattered, beaten senseless, and disarmed in three
incredible minutes of fighting against phantoms.
Only two escaped that first onslaught. They fled down The Ark's endless
corridors, firing around corners in a deadly, sniping rear-guard action at
their relentless pursuers. Strike, with the aid of captured weapons,
quickly laid out a foolproof campaign against the two remaining pirates.
The pirates were driven to the ship's stern by constant threat of being
outflanked, as the crew of The Ark infiltrated through dark side passages
and storerooms. Then, with the arsenal room in his hands, Strike ordered
anesthetic bombs broken in the ship's ventilating system. Everyone
donned masks. Presently, the two diehards were captured as they slept
soundly, faces flushed, in the galley.
The battle was over. Gerry, who had stood apart from actual combat by
Strike's insistence, rewarded the valiant victors with a kiss for each.

Tommy Strike, during his tumultuous career with his world-famous

fiancée, had known some wild celebrations. But he had never witnessed
anything like the welcome that awaited them this time.
At a brief stopover on Mars for fresh food, Gerry had broken the whole
fantastic story, which had promptly been forwarded by ether-beam to
Earth in complete detail—the treacherous attempt of pirates to seize The
Ark and murder its crew, the marooning, the outwitting of certain death,
the strange fight, and finally the return of Gerry Carlyle, bringing the
criminals back alive.
For the last leg of Mars-Earth run, they had an escort of police craft, and
in mid-space, an armed guard was put aboard. Privately, the crew
considered this very unnecessary, but Gerry permitted it only as part of a
hard bargain she characteristically drove—an understanding that before
Dacres was indicted, she would have first crack at his bank account to
pay for the trip to Triton, exactly as contracted for.
And now the home spaceport was in truth a sea of humanity, frothing
with white, as thousands of faces turned upward to watch the descent.
There were cheers, and speeches, and officials, and photographers, and
tele-newscasters.
Autograph-hunters broke through the police lines time and again. There
was a nasty few minutes as Dacres and his band were hustled through the
crowd to the police 'copters. And during it all, Gerry Carlyle and Tommy
Strike remained smiling, gracious and friendly. Such marked adulation
would have embarrassed any but the most poised.
Finally as the celebrants began to drift away, one of the reporters spotted
McCray standing patiently in The Ark's air-lock. Instantly, climax piled
upon climax, as the man shouted:
"Hey, look! It's Kid McCray! It's the missing Martian middleweight
champ!"
Back came the crowds, the cameramen, the broadcasters. The crew of
The Ark turned to McCray with jaws ludicrously agape. "You mean you
really are a boxing champion?" Gerry cried.
McCray grinned self-consciously.
"I tried to tell ya. Nobody wouldn't believe me, that's all."
"Well, I'll be—!" Gerry swore a ladylike oath, to the broadcasters'
confusion, and the delight of everyone else.
Then a hundred questions showered on the little group, and bit by bit the
amazing story behind McCray's presence on The Ark came out.
Darkness was approaching when the spectators, surfeited with the
excitement and surprises of the afternoon, at last gave the weary
wanderers rest.
Comparatively alone at last, The Ark's crew grinned feebly at one
another. Tommy Strike had been very thoughtful since McCray's identity
was established. Now he tried to move unobtrusively away. Too late. The
erstwhile, pushed-around menial placed a firm hand on the captain's arm.
"Uh, look, Mr. Strike. There's sump'in I just gotta do. I only dropped the
duke a few times in my life, an' every time I come back to reverse the
decision. Even with Dacres an' Monk, I squared things. So you're the
only fellow in the world to stop me—remember that first day in the pilot
room?—who I ain't got even with. Doncha see? I'm the champ. I just
have to reverse that decision." His eyes pleaded for understanding.
Strike nodded resignedly.
"Matter of principle, I suppose?"
"Sure." McCray nodded eagerly. "It won't take long. Just one
knockdown, strictly friendly. You won't hardly feel it, Mr. Strike."
"Okay." Strike's fists came up, and they squared off.
McCray bobbed and weaved, bored in after the retreating Strike—and
suddenly the pugilist's feet slid into a weird tangle and he sat down hard.
He leaned forward to clutch his ankle and howled in anguish.
Strike, who hadn't landed a blow, and the amazed spectators gathered
around. McCray's ankle was visibly swelling—a bad sprain. The bout
was over. "What on earth happened?" Strike inquired.
McCray gave up groaning a moment, pointed to the moist, bruised peel
of a Martian banana, then looked around accusingly for a culprit to
blame. His glance stopped on Gerry Carlyle, whose cheeks were bulging
as she chewed heroically. She gulped it down.
Breathless, she raised her fiancé's arm.
"The winnah," she cried, "and still champeen—Tommy Strike!"
Hand in hand, they ran laughing away into the darkness, while Kid
McCray beat the tarmac in futile exasperation.
"Aw, wait a minute," he wailed. "You just can't do this to me!"

[1] ω is the omega symbol.

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