Question

Suppose an economy E has a production possibility frontier characterized by the following equation: Y = - X 2 + 400 a. Draw the PPF b. Calculate 3 opportunity costs between 4 different points on the PPF, is it constant, or does it depend on the levels of output produced? c. Where does the point A = (10, 250) fall? Explain what it means. Where does the point B = (15, 200) fall? Explain what it means. Where should we produce and why? d. How can we illustrate an increase in Technology in the function? e. What is the difference between Productive efficiency and allocative efficiency?

Answer 1

- Equation of reduction Possibility frontier: Y = -x ² + 400 We know that PPF represent various contintien of goede that an monenly can produce by wing all available resources efficiently Giren PF equation Txo +20 is of a parabola When X=0 When yo y = 400 0 - 400 X-400 As X & Y are quantities so negative values are rejected. 450 Taking X= 5, y = -25+400 = 375 Taking x= 10, y = -100+400 = 300 So, 4 different points on PPF are A(0,400), 8(5, 375),(( 10, 300) and D/ 20,0) We know that, Opportunity cost at any point - slope at that point i

So, 3 opportunity costs are es bollown - Opportunity lost beturen points A and B - Dy y = 400-375 - is as Opportunity cost between points and C=Dy = 375-700-15-15 Opportunity cost between points (and D D - 300 - 300 - 30 No, the above values are not constant. Rather, they are increasing with increase in levels of output produced of good Given – point A=(10,250) and point B- (15,200) We have, y = -x ² + 400 At x = 10,4 =300 So, point A falls inside PPF. It means that at point A, resource allocation to production of goods X and ir Productively inefficient i.e. it is possible to increase production of one commodity without reducing production of other commodity Similarly, at x =15, y=-225 +100 =175 So, I point B falls outside PPF. It means that at point B production is not possible with the given existing resources and technology We should produce at a point which i Pareto Efficient i.e. it is impossible to find and

trade that will make no consumer porse off He can illustrate an increase in technology in the function by an outward shift of the giren PPF. Such a shift can be favouring a particular good more than other depending on the type of technological progres