Problem Set #1: Production Possibilities Curves
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: maximumoutput 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
1. Labour 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 options)
Option Clothes Food
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
f) The PPC is typicallydrawn concave to the origin. What would be the assumption underlying
a PPC which is a straight line?
g) What is the difference between the resource cost of a commodity and the opportunity cost of
- 1 - Problem Set #1: Production Possibilities Curves
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
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-
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
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 - Problem Set #1: 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, alter your diagram in part
b) 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
d) What would be the effect on opportunity cost of the amount of output for both Housing and
Food doubled 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 increases the output of food per resource by 50%. Sketch
the production possibility curve. What is the equation for the production possibilities curve?
1. Net Investment
a/ is the creation of capital goodsb/ is Gross Investment less Depreciation
c/ is the financial and physical assets used to make other goods
d/ is the Capital Stock of a country e/ only a/ and c/ are correct
2. A society can increase its production possibilities curve through
a) Investment = Depreciation
b) Net Investment
c) Emigration of the Labour Force
d) Technological improvement with no change in resources
e) only b) and d) are correct
3. If resources are not specialized - that is, there is perfect substitution of resources, then the
opportunity cost of different output options is