Question

Econ 201 Introduction to Microeconomics IN CLASS ASSIGNMENT 1 . Consider an economy called Choiceland that has 250 workers and produces only two goods, X and Y. Labour is the only factor of production, but some workers are better suited to producing X than Y (and vice versa). The table below shows the maximum levels of output of each good possible from various levels of labour input. Number of Workers Producing X Annual Production of Y Number of Workers Annual Production of X Producing Y 1300 250 1200 200 50 20 100 900 150 45 600 150 60 100 350 200 70 50 250 75 a. Draw the production possibilities boundary for Choiceland on a scale diagram, with the production of X on the horizontal axis and the production of Y on the vertical axis. b. Compute the opportunity cost of producing an extra 15 units of X if the economy is initially producing 45 units of X and 900 units of Y. How does this compare to the opportunity cost if the economy were initially producing 60 units of X and 600 units of Y? c. If Choiceland is producing 40 units of X and 600 units of Y, what is the opportunity cost of producing an extra 20 units of X? d. Suppose now that the technology associated with producing good Y improves, so that the maximum level of Y that can be produced from any given level of labour input increases by 10 percent. Explain (or show in a diagram) what happens to the production possibilities curve.

Answer 1

A) PPF.

PPF 13004 1200- 1100 1000 900- 800- 700 600 500 400- 300- 200 100- 10 20 30 40 50 60 70 80 Production of X Production of Y

B) X = 45, Y = 900

When X rises by 15, X'= 60, Y'= 600

So Opportunity cost is 300 units of Y

.

X= 60, Y = 600

When X rises by 15, X" = 75, Y" = 900

So Opportunity cost is 600 units of Y

.

c) now (40,600) lies inside of PPF, then if X rises by 20 , to 60

Then still 600 units of Y could be produced, so Opportunity cost is zero

PPF 13004 1200 1100 1000- 900- 800- 700 600- (40,600). 500- 400- 300 200 100- 10 20 30 40 50 60 70 80 Production of X Production of Y

D) PPF rotates upwards in direction to Y

For every X, Y rises by 10%

So new PPF lies upwards to Original PPF

Workers in Y	New Y
250	1330
200	1220
150	990
100	660
50	385
0	0

Production possibility frontier 1400- 1200 1000- 800 PPF1 PPF2 600- 400- 200 10 20 30 40 50 60 70 80 х