Question

1. We pay higher prices for TVs today than we paid 10 years ago. The higher prices today are likely due to

Choose one or more:

A. the higher quality of today's TVs.

B. a monopoly in the TV industry.

C. inflation.

1. please draw them.

A maker of custom footwear employs a small team of workers. They're all able to make both shoes and boots, but some are better at making shoes than they are at making boots, while with others the reverse is true. Some of the equipment is similarly better suited for making shoes than boots, and vice versa.

With that information in mind, use the curve tool in the graph below to sketch the shape of the firm's production possibilities frontier. (Click on the point at the upper left, then click on one of the three points in the middle, and finish by clicking on the point at the lower right.)

Quantity of shoes

3. An auto factory produces a popular, entry-level car in both sedan and hatchback versions. The graph below shows the factory's production possibilities frontier. As the dot indicates, the factory is currently producing 750 sedans and 600 hatchbacks per day.

Move the point to a location representing inefficient production.

Answer 1

1) We are paying higher prices for TV. The reasons given are"

a) The higher quality of today's TVs

b) a monopoly in the TV industry

c) Inflation

Let us analyse the reasons

a) The higher quality of today's TVs : The reason for higher quality is new technologies developed by the industry. The development of new technologies requires input of capital. To recover this invested capital, the price of upgraded version should be increased. Thus, this reason is possible.

b) a monopoly in the TV industry : In a monopoly market, the company which has a monopoly is the 'price maker', that is they decide price of the commodity (TV in this case). However, the price is kept at a level such that profits are maximized. Keeping higher rates adversely affects the sales and hence the profits. Therefore, monopoly in any industry will not necessarily mean rise in price (though this is possible in some cases where the monopolized goods are essential and the demand is nonelastic). So this reason is not possible.

c) Inflation : Inflation always leads to a price rise across the market. This is due to the fact that inflation leads to a price rise in cost of human capital (salaries) and raw materials. Therefore, price of finished products should be increased to compensate for that. Thus, this reason is possible.

Therefore, the answer will be:

A. The higher quality of today's TVs

C. Inflation

2) Consider the case of manufacturing shoes vs manufacturing boots. Here, some machines and some workers are better suited to manufacture of boots and other are better suited to manufacture of shoes.

Consider a case where only boots are manufactured. Here, the machines and workers which are better suited to manufacture of shoes are being underutilized and those suited to boots are being efficiently utilized. As the number of shoes manufactured increases by a small amount, the efficiency of workers and machines manufacturing shoes increases, and more number of shoes can be produced by sacrificing less number of boots.

As the number of shoes manufactured further increases, beyond a certain point, the workers and machines which are better suited to manufacture of boots will now be have to used for manufacture of shoes. This means that the resources better suited to manufacture of boots are now underutilized for manufacture of shoes. Therefore, less number of shoes can be produced by sacrificing more number of boots.

• This is known as the law of diminishing returns and it occurs because not all factor inputs are equally suited to producing items.
• This will lead to the production possibilities frontier to be concave with respect to the origin, meaning that  as more resources are allocated towards Good Y (in this case boots) the extra output gets smaller – so more of Good X has to be given up in order to produce Good Y (in this case shoes

Therefore, the production possibilities frontier will look as shown below:

Quantity of shoes

3) In case of a production possibilities frontier, any point which lies on the curve represents efficient production. Any point below the curve, represents inefficient production and any point above the curve represents impossibility of production using existing resources and technology.

Therefore, drag the point anywhere below the curve. This is shown in graph below:

Quantity of hatchbacks hundreds per day) Quantity of sedans

Note that the black point represents inefficient production. You can as well drag this point to anywhere below the production possibilities frontier.