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Production Possibilities

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Microeconomics Problem Set: Production Possibilities Curves Key Concepts: Resources: The basic inputs in the production of goods and services Labour: Human time and effort applied to the production of goods and services Capital: Productive inputs produced by society Land: Natural resources prior to human production Consumer Goods: Goods or services to satisfyconsumer wants Production Possibilities Curve: Maximum output combinations of two commodities from given resources and technology Opportunity Cost: The cost of the best foregone option Commodities: Tangible (goods) and intangible (services) items for sale Problems 1. Labour is the onlyresource in an economy with the following maximum production possibilities. (The graph is drawn as a curve rather than points under the assumption that opportunity cost is constant between options) Option Clothes Food (Tons) (Tons) 1 50 0 2 40 30 3 20 70 4 0 100 a) What is the opportunity cost of increasing Clothes production from 20 to 40 tonnes? b) What is the opportunity cost of increasing Food output from 70 to 100 tonnes? c) Is point D an output option for this economy? Explain your answer. d) What does point B represent in terms of resources? e) Is point C a better output combination than A? Explain. f) What change in the economy is necessary to produce 50 tons of Clothes and 50 tons of Food if the labour force remains unchanged? 2. The table below gives some production possibilities for a country producing onlytwo goods: raw material output (Qr) and manufacturing output (Qm). Allresources are fullyemployed. Assume constant opportunity costs between these options. Qr (units) 11 10 8.5 6 3 0 Qm (units) 0 2 4 6 8 8.5 a) Graph the production possibilities curve with Qr on the horizontal axis. b) What is the opportunity cost to the economy of increasing manufacturing output (Qm) from: (i) 0 to 2 units? (ii) 2 to 8 units? c) Pick a point on your diagram to represent less than fullemployment of labour force is employed (relax the fullemployment assumption). d) Graph the effects of a technological improvement that increases productivity in the manufacturing sector only. e) Starting from your original graph, illustrate the effects of a contraction in the labour force (e.g., emigration) with no technological change in either the raw material or manufacturing sectors. f) The PPC is typicallydrawn concave to the origin. What would be the assumption underlying a PPC which is a straight line? - 1 - Microeconomics Problem Set: Production Possibilities Curves g) What is the difference between the resource cost of a commodity and the opportunity cost of a commodity? 3. The following table gives the production possibilities for an economy with fullemployment of its resources, land, labour, and capital. Option A B C D E F Steel (thousand tons) 100 90 70 50 25 0 Bread (million loaves) 0 60 120 160 180 200 a) What is the opportunity cost of increasing bread output from 60 to 120 million loaves? b) What is the opportunity cost per tonne of raising steel output from 50 to 70 thousand tons? c) What is the opportunity cost of increasing bread output from 169 to 170 million loaves if opportunity cost is constant within this option? d) What are the intercepts on the vertical (Steel) and horizontal (Bread) axes for the Production Possibilities curve that results if technological change increases Steel output by 50% and Bread output by 25% with no change in resources. e/ What is the effect on the Production Possibilities curve if gross investment is greater than depreciation? 4. Albert: "In the last few years there has been dramatic progress in agriculture. New techniques and equipment have brought large increases in productivity". Basil: "Agricultural output, however, has hardlyincreased at all. It is non-agricultural output that has increased even though there has been relativelylittle technological progress in non- agricultural industries". Assuming that both Albert's and Basil's facts are right, and that there is fullemployment: can you reconcile their statements? Portray your explanation on a production possibilitycurve, with agricultural output on the horizontal axis and non-agricultural output on the vertical axis. 5. Consider the following Production Possibilities Curve. Assume that opportunity cost of individual units is constant within each option. Option A B C D E F G Capital Goods (Units) 30 28 25 20 15 10 0 Consumer Goods (Units) 0 10 19 25 30 35 40 a) What is the opportunity cost of adding the 29th unit of consumer goods? b) What is the opportunity cost of increasing capital goods output from 25 to 30 units? c) What is the opportunity cost of increasing output from 15 capital goods and 25 consumer goods to 20 capital goods and 25 consumer goods? d) Opportunity cost is constant between which options? e) Draw the production possibilitycurve that results from technological change that increases capital goods production by 33% without affecting consumer goods output. f) Draw a curve on the diagram representing the production possibilitycurve following a war that destroys half the country's land, labour, and capital. Label this curve W. g) Suppose depreciation is 15 units of Capital. Willthe Production Possibilities curve be smaller, unchanged, or greater in the next time period if the option chosen is i) C? ii) F? ii) E? - 2 - Microeconomics Problem Set: Production Possibilities Curves 6. Suppose that Labour is Canada's only resource and that one unit of Labour can produce either 2 units of Housing or 5 units of Food. a) Draw Canada's Production PossibilityCurve (PPCo) if Canada has 50 units of Labour. Put Housing on the vertical axis. b) Now draw in your diagram the Production Possibilities Curve that would result if technological change doubled only the Housing output of a unit of Labour. (2 marks) c) Using any point (Qo) on your original PPCo curve as a reference, choose a point on your new production possibilities curve to demonstrate how the output of Housing chosen by society to consume could decline even if there was fullemployment and a technological doubling of Housing output per labour unit. d) What would be the effect on opportunity cost of Housing and Food if technological changed doubled output of both for a unit of Labour? 7. The production possibilies curve for a country producing Food and Lumber is F = 1800 –3L. a) What is the maximimu amount of food that this country can produce? b) What is the maximumamount of lumber that this country can produce? c) What is the opportunity cost of increasing lumber production from 500 to 600 units? What is the opportunity per unit of raising food production from 200 to 201 units? d) Suppose that the economy is presently producing 400 units of lumber and 400 units of food. What is the opportunity cost of producing 600 units of food and 400 units of lumber? e) Suppose that this country has 300 units of a homogeneous resource (comprised of capital, labour, and land). What is the output of lumber per unit of resource? What is the output of food per unit of resource? f) Suppose that the country would like to produce 600 units of lumber and 600 units of food. If there is no technological change, what is the minimumamount of resources needed to produce this output? f) Suppose that technological change increase
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