Question

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 .

Short answer

Also, draw and label the production possibility frontier for Bermuda's actual production in 2009. Answer: If all fishermen work in hotels, the potential production of hotel stays will be 1,328,400. On the other hand, if all hotel employees become fishermen, the potential fish production will be 388.3595 metric tons. To draw the production possibility frontier, plot a straight line with fish production on the horizontal axis and hotel stays on the vertical axis, connecting the endpoints (0, 1,328,400) and (388.3595, 0). Label Bermuda's actual production point for 2009 as (387, 554,400) on the PPF.

Step-by-step solution

Calculate the additional hotel stays produced by 306 fishermen

As given, the opportunity cost of 1 additional metric ton of fish is 2,000 hotel stays. So, the combined opportunity cost of 387 metric tons of fish (caught by all 306 fishermen) will be: 387 * 2,000 = 774,000 hotel stays.

Calculate total hotel stays if all fishermen work in hotels

If all 306 registered fishermen were to be employed by hotels (in addition to the 2,719 people already working in hotels), then the total number of hotel stays produced will be: 554,400 (current hotel stays produced) + 774,000 (additional hotel stays) = 1,328,400 hotel stays. #b. Calculate potential fish production#

Calculate the number of metric tons of fish produced by one hotel worker

Given that the opportunity cost of 1 additional metric ton of fish is 2,000 hotel stays, we can calculate the number of metric tons of fish that can be produced by one hotel worker: 1 metric ton / 2,000 = 0.0005 metric tons.

Calculate potential fish production if all hotel employees become fishermen

If all 2,719 hotel workers were to become fishermen, then the potential production of fish will be: 2,719 * 0.0005 = 1.3595 metric tons. Adding this to the current fish production, we get: 387 (current fish production) + 1.3595 = 388.3595 metric tons of fish. #c. Draw a production possibility frontier#

Mark the endpoints of the PPF

The endpoints of the PPF will be: (0, 1,328,400) when all workers are in the hotel industry, producing the maximum number of hotel stays; and (388.3595, 0) when all workers are in the fishery industry, producing the maximum number of metric tons of fish.

Draw the PPF and label Bermuda's actual production point for 2009

To draw the production possibility frontier, plot a straight line with fish (in metric tons) on the horizontal axis and hotel stays on the vertical axis, connecting the two endpoints: (0, 1,328,400) and (388.3595, 0). To label Bermuda's actual production point for 2009, plot the point (387, 554,400), representing the actual fish production and hotel stays in 2009. As per the given information, this point lies on the PPF, indicating efficient production.

Key concepts

Opportunity Cost

Opportunity cost is a key concept in understanding the trade-offs in decision-making. In the context of the Bermuda case, opportunity cost refers to the potential benefit lost when choosing one production activity over another. For the island of Bermuda, the opportunity cost of producing an additional metric ton of fish is 2,000 hotel stays.
This means if Bermuda decides to increase fish production by one metric ton, it must give up producing 2,000 hotel stays. This constant opportunity cost highlights a trade-off on the Production Possibility Frontier (PPF). The PPF curve demonstrates all possible combinations of two goods that can be produced given available resources and technology. Therefore, every choice to produce more of one good leads to a reduction in the production of the other good due to limited resources.
This concept emphasizes the reality of scarcity and the need for careful decision-making in resource allocation. Understanding opportunity cost helps in optimizing the use of resources by examining the potential gains and losses associated with different production choices.

Efficiency in Production

Efficiency in production is about maximizing output with the given resources and technology. In the case of Bermuda, its current production point of 387 metric tons of fish and 554,400 hotel stays indicates that the island operates on its Production Possibility Frontier (PPF).
Being on the PPF implies that resources are being used effectively without any waste, and it's impossible to produce more of one good without sacrificing the production of another. Efficiency is achieved when the allocation of resources maximizes total production and output. An economy that produces on its PPF showcases efficiency, whereas any point inside the PPF indicates inefficient use of resources where more of one or both goods could be produced without additional inputs. Reaching efficiency involves ensuring that all inputs are being utilized optimally to produce output. For Bermuda to maintain or improve its efficiency, it must consider both resource allocation and technological advancement to push its PPF outward.

Resource Allocation

Resource allocation is crucial for an economy to ensure that resources are distributed in a way that maximizes overall production and welfare. In Bermuda, decisions must be made on how best to divide labor between the fishing and tourism industries. This allocation determines the possible production combinations of fish and hotel stays. To maximize output, Bermuda must consider the benefits and costs of adjusting labor between these industries. Effective resource allocation requires assessing factors like opportunity costs and potential economic gains. Based on the constant opportunity cost in Bermuda's scenario, shifting workers fully to one industry or the other impacts the balance of goods produced. This is reflected in the endpoints of the PPF, with each endpoint representing all resources dedicated to one industry entirely. In making such allocation decisions, Bermuda aims to strike a balance where the benefit of producing each staple industry maximizes community welfare and economic growth. Through careful resource allocation, the island can ensure that it produces desired results most effectively.