Question

a. The following is a set of hypothetical production possibilities for a nation. Cars Computers 0 450 Combination А B с 100 420 330 250 D 380 270 E 510 150 F 550 0 1) Plot the production possibility for the nation. i1) What is the opportunity cost of the first 100 computers produced? iii) What would be happening if this nation is only producing combinations of 200 computers and 300 cars? iv) Show what would happen to the production possibility frontier if this nation introduced an improved new technology that allowed it to double its production of cars. The productivity of computers is unchanged. v) Explain how the production possibilities frontier reflects the law of increasing opportunity costs.

Answer 1

(i) The PPF can be derived by taking computers on horizontal axis and cars on vertical axis, and plotting the given combinations. The shape of the PPC will be shaped concave to the origin.

Cars 900 PPF2 450 PPFN 550 Computers

(ii) When the first 100 computers are produced, the production of cars decreases from 450 to 420. Thus the opportunity cost of first 100 computers is 450-420 = 30 cars.

(iii) If the nation is producing 200 computers and 300 cars, this combination lies below the PPC curve. This combination is inefficient since the nation is not using all its resources efficiently and to their full capacity. It represents underutilization of the resources.

(iv) If the production of cars doubles due to new technology, the PPF will pivot outwards on the y axis (representing cars). The new intercept for PPF on y axis will be 900 cars instead of 450 cars. The intercept on x axis will remain the same. The new PPF is represented by blue color.

(v) The law of increasing opportunity cost is the concept that as you continue to increase production of one good, the opportunity cost of producing that next unit increases. For the first 100 computers, the opportunity cost is 30 cars. For the next 50 computers, the opportunity cost is 90 cars, and so on. Thus the opportunity cost is increasing as we shift resources from production of computers to cars. Thus the PPF reflects the law of increasing opportunity costs.