Question

The table below contains the Production Possibilities Frontier (PPF) data for Country ABC. It contains the maximum possible combinations of guns and butter that can be produced in a given period of time:

Units of Guns (thousands)	Units of Butter (kilos)
14	5
11	6
9	8
8	11

A. What is the opportunity cost of moving from producing 9 thousand units of guns to 14 thousand units of guns stated in terms of 1 unit of guns? ­­­­­­­­­­­­

B.  Explain in your words why Production Possibility Curve is Convex shape ?

C. Give three factors that shift the PPC to the right.

Answer 1

1. It can be mentioned that the opportunity cost of moving 9 to 14 guns =

Change in units of butter/ Change in units of guns

= (8-5)/(14-9) = ⅗ = 0.6 units of butter per unit gun.

1. It can be mentioned that if there is a decreasing marginal rate of transformation, shape of the production possibility Frontier would be convex. marginal rate of transformation is nothing but how much amount of good you have to sacrifice to get one extra unit of the other and if this is decreasing continuously, then less unit sacrifices of one can get more units of other and this makes the curve convex.

1. Three reasons why PPF can shift to right

i) increase in income of the people as a result of which we get to consume more products as a result of which the combination increases continuous with and the production possibility Frontier shift to the right

ii) increasing the technological aspect with which the production cost producers in the productivity increases as a result of which the PPF shifts to the right

iii) reducing the trade barriers in get to make the goods cheaper as a result of which the price of the goods decrease with which the consumption increases and the production possibility Frontier shift the right.