Question

Production Possibilities Assignment Scenario: Suppose you are the manager of a consulting firm that designs and produces custom software solutions for your clients. To accomplish these tasks you supervise a staff of 100 programmer/analysts. For reasons dictated by the needs of your clients, and by the nature of your business, you offer and sell two separate services, technical design specifications (a document describing how best to solve a client's problem) and actual implementations (in the form of hardware and software). Staff Members Assigned to Design Projects Design Projects Completed Staff Members Assigned to Implementation Projects 100 Implementation Projects Completed 75 In the following graph, plot the productions possibilities for the consulting firm (four points): Implementations

Answer 1

A. The production possibility graph has been drawn below. A production possibility graph draws the trade-off between producing 2 goods, given set amount of inputs. In our case, the inputs are staff members and their number is mixed. To produce more of one type of project, lets say design, we must sacrifice some of the other type- which is implementation. The production possibility graph shows that only.

Implementatons 761 I (0,15) e a (29,14 ) to u (35, 12) (45,7) I ow & hof toe to T5 po 25 30 35 40 45 s Designs

B. There are 2 main things to note here- we are assuming that oil market is an oligopoly with a few producers and they all produce the same good.

Before Saudi Arabia increases its output, our market is in a certain equilibrium given the quantity supplied. From a standard demand supply graph such as shown below, we can see that at the current supply, quantity Q₁ is being demanded at price P₁. This is the current equilibrium.

Price Supply Demand P1 + - S Q1 Quantity

When Saudi Arabia decides to increase its oil production by a massive amount, it effectively shifts the supply curve to the right side. This is shown in the graph below. The increased supply will lead to lower equilibrium price since demand is the same. This is shown in the graph as new price P2 and new quantity Q2.

Price Supply Demand Q1 Q2 Quantity

Now remember that the market is an oligopoly (though a cartel is not mentioned in the question). What will happen now is that in the short run, Saudi Arabia's profit will increase while the overall industry profit will decrease. In the long-run, given that the product is homogenous- other producers will increase their own supply to make sure their share is not taken away. This will lead to further reduction of overall market price. They all will again end up with same profit share, but lower overall profit.

This is an example of non-pareto efficient allocation and game theory. Pareto efficient output would've given maximum overall profit in the oligopolistic market. But since all are ending up with lower total profit, its not pareto efficient. Also, since all players decide it is best to not cooperate with each other, we get an example of Prisoner's dilemma in game theory.