Question

Please go through all, but if not able, please thoroughly go through d,e, & f. It would be very helpful.

4. Suppose that society could produce the following combinations of pizzas and books: Alternative Quantity of pizzas Quantity of books 50 40 30 20 10 10 18 24 28 30 a. Using graph paper (or a computer program), draw the production-possibilities frontier (PPF) for pizza and books, being as exact and neat as possible. (Put books on the horizontal axis. Assume that the dots define a complete curve.) b. Is it possible or efficient for this society to pro- c. Is it possible or efficient for this society to pro- d. If society is currently producing alternative B, duce 25 pizzas and 25 books? duce 42 pizzas and 1 book? then the opportunity cost of moving to alterna- tive A (and getting 10 more pizzas) is books. e. Is the opportunity cost of producing pizzas higher or lower moving from alternative F to E than moving from alternative B to A? Why is this likely to be so? f. Suppose that the technologies used in produc- ing both pizzas and books improve. Draw one possible new production-possibilities frontier in the graph above that represents the results of this change. Indicate the direction of the change that occurs with an arrow.

Answer 1

d. Opportunity cost is loss of other alternatives.

If we are at B, then we are producing 40 pizzas and 10 books. And if we move from B to A then we will produce 10 more pizzas but we will lost 10 books. Thus, the opportunity cost of producing 10 more pizzas is 10 books.

Therefore, opportunity cost per pizza = Change in Books (from B to A) / Change in pizzas (from B to A) = (10-0)/((40-50) = -1

Thus, opportunity cost of producing one more pizza (from B to A) is 1 book.

e) Let's first calculate opportunity cost of pizza from point F to E

opportunity cost per pizza (from F to E) = (30-28)/(0-10) = 2/(-10) = -0.2

As you can see the opportunity cost from F to E is 0.2, whereas it was 1 from B to A. Thus, the opportunity cost is lower from F to E.

It happens because of increasing marginal rate of substitution. It implies that the opportunity cost increases as more and more of a good is produced by giving up production of another good.

f) When technology improves, more of good can be produced with given resources. To which the PPF moves outward. As here the technologies of both good improves thus the PPF will move outward from both sides (pizza and books).

The red colored PPF is new PPF when technologies improve.