Question

Question 3:                                                                                                             

1. Draw a production possibilities frontier showing increasing opportunity cost for hammers and horseshoes.

2. For what reason are production possibilities frontiers usually bowed outward?

3. On a graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy.

4. On a graph for hammers and horseshoes, illustrate the effect a new computerized assembly line in the production of hammers would have.

Answer 1

A. production possibility curve shows the increasing opportunity cost function as an increase in the production of more units of Good A, it will increase its loss of another good in a production process.

Here, the PPF that shows increasing opportunity cost for hammers and horseshoes is given below:

This graph shows that if production moves from point A to point C, it will increase the opportunity cost of producing more hammer; while, if production moves from point B to point C, it increases the opportunity cost of production more horseshoes.

B. Production Possibility frontiers are usually bowed outward under the assumption that resources are utilized efficiently. A bowed PPF explains that the resources are specialized, and can be used for producing more of both the goods.

C. iron ore is used as an input resource for making hammer and horseshoes to sell in the market. The discovery of a new vein of iron ore will increase the supply of iron ore that lead to a decrease in its price. As a result, input for hammer and horseshoes become cheaper and can be purchased more in the existing cost. Therefore, PPF will shift outward, as shown in the graph below:

D. A new computerized assembly line helps to reduce the waste of resources; therefore, more units of the hammer can be produced with the given amount of resources. As a result, PPF will partially shift outward towards the hammer as a new computerized assembly line increases its production that is shown in the graph below: