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Irene Cheung

Problem Set 1 Production Possibilities CurvesKey ConceptsResourcesthe basic inputs in the production of goods and servicesLabour human time and effort applied to the production of goods and servicesCapital productive inputs produced by societyLandnatural resources prior to human productionConsumer Goodsgoods or services to satisfy consumer wantsProduction Possibilities Curve maximum output combinations of two commodities from given resources and technologyOpportunity Cost the cost of the best foregone optionCommodities tangible goods and intangible services items for sale Problems1Labour is the only resource 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 optionsOptionClothesFoodTonsTons150024030320704 0100 aWhat is the opportunity cost of increasing Clothes production from 20 to 40 tonnes bWhat is the opportunity cost of increasing Food output from 70 to 100 tonnescIs point D an output option for this economy Explain your answerdWhat does point B represent in terms of resourceseIs point C a better output combination than A ExplainfWhat change in the economy is necessary to produce 50 tons of Clothes and 50 tons of Food if the labour force remains unchanged2The table below gives some production possibilities for a country producing only two goods raw material output Qr and manufacturing output Qm All resources are fully employed Assume constant opportunity costs between these optionsQr units111085630Qm units 0 246885aGraph the production possibilities curve with Qr on the horizontal axisbWhat is the opportunity cost to the economy of increasing manufacturing output Qm fromi0 to 2 unitsii2 to 8 unitscPick a point on your diagram to represent less than full employment of labour force is employed relax the full employment assumptiondGraph the effects of a technological improvement that increases productivity in the manufacturing sector onlyeStarting from your original graph illustrate the effects of a contraction in the labour force eg emigration with no technological change in either the raw material or manufacturing sectors fThe PPC is typically drawn concave to the origin What would be the assumption underlying a PPC which is a straight linegWhat is the difference between the resource cost of a commodity and the opportunity cost of1
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