Question

Question 4 (T/I 12 marks) The following graph presents the production possibilities curves for three rival companies. Study each curve carefully, then answer the questions below: 12 12345 6 7 89 10 11 12 Product X (thousands) a) transformation ratio from one product to another. Identify the company and prove that your selection is correct. (2 marks) For one of these companies, relative costs are constant. As a result, there is a constant b) For one of these companies, the production factors are such that it would be better off producing ample quantities of both products, rather than attempting to specialize. Identify the company and prove that your selection is correct. (2 marks) Product Y (thouands) Cimpe

Answer 1

a.) Relative costs can be defined as expenses incurred on switching from one product to the another. The relative cost would be constant for company B as its curve is a straight line which depicts that total number of products of X and Y remains constant and hence the cost of switching would remain constant.

b.) With compny A it would be better to produce large quantities of both the products as it is clear from the curve that specializing will only enable us to produce 9000 units of either X or Y. While mixing both the products can help us produce upto total of 12000 units.

c.) With compny C it would be better to produce quantities of only one product as it is clear from the curve that specializing will enable us to produce total 8000 units of either X or Y while mixing both the products can only  help us to produce less than 8000 units.

d.) The law of diminishing return is visible in curve of company A as the number of units of product Y sacrificed to gain 1000 units of product X keeps on increasing as we move along the curve. Hence the returns can be seen to be diminshing.