To sketch the production
possibilities frontier (PPF)
To illustrate the notion of
efficient utilization of resources
To understand the
interpretation of the slope at a point on the
PPF
To compare the slopes at
different points on the PPF
To understand the Principle of Increasing Costs
II. Data
The equation of the PPF is
given by 2X2
+ Y2
= 10000, where X
is the quantity of Good 1 (muffins) and Y
is the quantity of Good 2 (computers).
Sketch the PPF with muffins
on the horizontal axis. Indicate the
intercepts. Note that the PPF is bowed outwards.
Select a value for X.
Click on Gimme PPF!
to
obtain the maximum amount of computers (Y)
that can be
produced, and the slope of the PPF at that point. (For those who
remember their calculus days, the slope is -2X/Y.)
III. Questions
Sketch the PPF with muffins
on the horizontal axis.
Compute the horizontal
and vertical intercepts.
Indicate them on the
graph.
Suppose the country produces
the following combination: 65
muffins and 30 computers.
Is production efficient?
Explain.
Indicate the production
point on the graph.
Given its resources, can the
country produce 60 muffins and
56 computers? Explain, using the graph.
Suppose the country is
currently producing on the PPF at Point A
where X
= 45. The slope at A is given to be -1.17.
Obtain the corresponding
quantity of computers produced.
Indicate Point A on the
graph.
If the country were to
produce an additional muffin at A, it
must give up __________ computers. Explain.
Consider Point B on the PPF
such that X
= 60. The slope
at B is -2.27.
Find Y
and indicate Point B on the graph.
The opportunity cost of
an additional muffin at B is
____________ computers.
Compare Points A and B.
The opportunity cost of
producing muffins at B is [ greater
/ smaller ] than that at A.
The magnitude of the
slope at B is [ greater /
smaller
] than that at A.
Do the slopes at A and B
reflect the principle of increasing
costs?
In which case will the
future PPF lie further to the right:
(a) The country's current production occurs at Point A, or
(b) The country's current production occurs at Point B?
Explain. Provide sketches of the likely positions of the future PPF in
both cases. [Hint: Which of the two goods is considered to be a capital
good?]
Evaluate the following
statement critically: "If the
country
devotes more resources to the production of consumption goods than that
of capital goods, the resulting production is not efficient."
IV. Additional questions
A country produces two goods
using various inputs. Which of the
following will cause the PPF to shift outwards?
An increase in the
labor force
Improvement in
technology
Fall in unemployment
All of the above
Both a and b
The principle of increasing
cost
Implies that an
increase in wages will lead to a higher cost
of production for firms
Is exhibited by the
bowed-out shape of the typical PPF
Implies that production
will never occur at some point above
the PPF
All of the above
None of the above
Efficient allocation of
resources occurs when
Production occurs at a
point on the PPF
The quantity of capital
goods produced is greater than that
of consumption goods
All resources are used
fully
Both a and b
Both a and c
The unemployment rate fell
from 8% to 6%. This means that
The economy moved
closer to the PPF
The PPF shifted
outwards, away from the origin
The PPF shifted to the
left towards the origin
The economy moved down
along the PPF
None of the above
Consider a typical PPF with
quantity of beer on the X-axis and
quantity of milk on the Y-axis. Now answer Q.5 and Q.6 below.
The magnitude of the slope
of the PPF at a point represents
The opportunity cost of
producing an additional unit of beer
The opportunity cost of
producing an additional unit of milk
The amount of beer that
must be foregone in order to produce
an additional unit of milk
Both a and c
Both b and c
As the economy moves down
along the PPF, the opportunity cost of
producing beer
Increases
Decreases
Will decrease if
unemployment is not too high
Remains constant
Initially increases and
then decreases
The principle of increasing
costs is associated with which of the
following?
The PPF becomes
increasingly steep as the economy moves up
and along the curve to the left
Inputs tend to be
specialized in production
A new invention causes
the economy to move closer to the PPF
All of the above
Both a and c
A country produces two
goods. Which ONE of the following will not
cause the PPF to shift outwards?
A more highly-educated
labor force
Improvement in
technology
Fall in unemployment
A discovery of mineral
resources in the country
Addition to the
country's capital stock
An increase
in the unemployment rate would imply that
The economy has moved
to a point closer to the PPF
The economy has moved
away from the PPF to a point closer to
the origin
The PPF has shifted to
the left towards the origin
The economy has moved
down along the PPF
None of the above is
correct
Ray, the well-known
economist, has developed a model of the
economy of his home country, Ovac. The other day, he used it to analyze
the effect of a sales tax on the consumption of batteries. What he
discovered electrified him. He wrote: Imposing a tax of 75
cents-a-battery will lead consumers to buy 100,000 fewer batteries a
year.
Ray's statement is an
example of normative economics. True or
false? Give reasons. If false, how would you correct it?
One day, Ray started
thinking about his country's PPF. Ovac was
currently producing two goods - machines and nachos. He knew that
production was efficient. This year, Ovac's output was going to be 550
machines and 3000 tons of nachos. He wondered what next year's PPF
would look like. Then he turned to his trusted model. What would next
year's PPF look like, he wondered, if Ovac produced at another point on
the PPF this year, say 700 machines and 2100 tons of nachos?
Explain what a PPF
represents.
Sketch Ovac's PPF for
the current year. Indicate this year's
production point on the graph.
Does the production
point lie below the PPF? Why?
Sketch possible
positions of the PPF for next year under the
two scenarios mentioned above. Explain why this year's choice of
production affects next year's production possibilities.
Say, Ovac's economy did
increase its production of machines
from 550 to 700. What would be the opportunity cost of doing so?
Explain.