Solved: Robinson Crusoe has decided that he will spend

exactly 8
Robinson Crusoe has decided that he will spend exactly 8

Robinson Crusoe has decided that he will spend exactly 8 hours a day gathering food. He can
either spend this time gathering coconuts or catching fish. He can catch 1 fish per hour and he
can gather 2 coconuts per hour. On the graph below, show Robinson’s production possibility
frontier between fish and coconuts per day. Write an equation for the line segment that is
Robinson’s production possibility frontier.

F + C/2 = 8.

(a) Robinson’s utility function is U(F,C) = FC, where F is his daily fish consumption and C is his
daily coconut consumption. On the graph above, sketch the indifference curve that gives
Robinson a utility of 4, and also sketch the indifference curve that gives him a utility of 8. How
many fish will Robinson choose to catch per day? _________ How many coconuts will he
collect? _____________

(b) Suppose Robinson is not isolated on an island in the Pacific, but is retired and lives next to a
grocery store where he can buy either fish or coconuts. If fish cost $1 per fish, how much would
coconuts have to cost in order that he would choose to consume twice as many coconuts as
fish? _________ Suppose that a social planner decided that he wanted Robinson to consume 4
fish and 8 coconuts per day. He could do this by setting the price of fish equal to $1, the price of
coconuts equal to _____________ and giving Robinson a daily income of $ _______

(c) Back on his island, Robinson has little else to do, so he pretends that he is running a
competitive firm that produces fish and coconuts. He wonders, “What would the price have to
be to make me do just what I am actually doing? Let’s assume that fish are the numeraire and
have a price of $1. And let’s pretend that I have access to a competitive labor market where I
can hire as much labor as I want at some given wage. There is a constant returns to scale
technology. An hour’s labor produces one fish or 2 coconuts. At wages above $ ________ per
hour, I wouldn’t produce any fish at all, because it would cost me more than $1 to produce a
fish. At wages below $ __________ per hour, I would want to produce infinitely many fish since
I would make a profit on every one. So the only possible wage rate that would make me choose
to produce a positive finite amount of fish is $ 1 per hour. Now what would the price of coconuts
have to be to induce me to produce a positive number of coconuts. At the wage rate I just
found, the cost of producing a coconut is ______. At this price and only at this price, would I be
willing to produce a finite positive number of coconuts.”

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 Robinson Crusoe has decided that he will spend exactly 8

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