[Solution]Gilligan’s Island

The situation: Gilligan, the Skipper, the Professor, Ginger, Mary-Ann and Mr. and Mrs. Howell have adopted the US dollar as their currency (each had some…

The situation:
Gilligan, the Skipper, the Professor, Ginger, Mary-Ann and Mr. and Mrs. Howell have adopted the US dollar as their currency (each had some currency in their pockets/bags at the time of shipwreck). They have been on the island for about a year and have each learn to produce goods/services according to their respective comparative advantages. They each pay for the service of one another.
The island economy could be broken into seven sectors with some workers employed in multiple sectors. Gilligan is employed in six sectors: he is unskilled labor and can easily shift production. The Professor and the Howells are employed in only two or one sectors respectively. Their skills are highly specialized and not easily shifted. Remember why the Production Possibilities Curve is bowed?
Suppose the initial distribution of money:
The Howells: $10,000 Ginger: $2000 The Professor: $500 Mary-Ann: $100 The Skipper: $50 Gilligan: $20
1. Who initially has the most buying power?______________________
2. What is the money supply?________ Which measure is that?_____

3. On the island, what determines the long-run potential output of the economy?________________ _________________________________________________________________________________
a. What will happen to GDP in period 2, if the Professor learns how to conduct electricity through a vine and the Skipper learns how to spearfish? Would this be a long-run change or a short- run change? ________________________________________________________ ________________________________________________________________________
b. What does 3a imply about AS-AD? Sketch changes.
c. Can you explain this function: Y= Tƒ(L,K,N,H)?_________________________________ ___________________________________________________________________________ ___________________________________________________________________________
4. At the beginning of period 3, the professor, being absent minded, goes for a swim in the lagoon with 75% of his wealth in his shorts pocket. The money, now $500, is forever lost in the water.

a. What does that mean for the Professor’s consumption?_____________________________ ___________________________________________________________________________
b. What does this mean for the island’s money supply?_________________
c. Are there any implications for AS-AD? Sketch changes.
d. Does this event affect the long-run ability of the economy to produce? Why? Why not? ___________________________________________________________________________ ___________________________________________________________________________
e. Thanks to the Professor, in the long-run the island economy now has more the same amount fewer dollars chasing more the same amount fewer goods (circle the correct answers). What should happen to the price level?_________________________________
f. Are the remaining dollars valued more or less? ________________________________________________________
5. At the beginning or period 4, a single propeller plane is seen crashing on the horizon. The next day, the Skipper finds a box labeled, “FedEx” on the beach. When he opens the box, he finds a pair of ice skates. Fortunately, he has seen the movie Castaway and he knows how to use these skates to cut trees and vines.
a. How would an economist view the skates in this situation?________________________
b. Will the Skipper be able to make more housing and communication equipment with the aid of the skates? ______

c. Sketch this change in the AS-AD model.
d. What is likely to happen to GDP on the island? Is this a real change or a nominal change? _______________________________________________________________________
e. Since the Skipper owns the skates and knows how to use them, is his labor more or less valuable? What might happen to his wages?____________________________________
6. At the beginning of period 5, Mary-Ann finds another item presumably lost from the plane. She finds a zip-lock bag containing $1000 cash.
a. What does that mean for Mary-Ann’s buying power and consumption?________________ ___________________________________________________________________________
b. Sketch this result in the AS-AD model.
c. Does real output increase in the short-run?_______
d. Does Mary-Ann’s new found wealth, itself, affect the ability of the economy to produce? _______

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