Question

Suppose Andy can make 20 loaves of bread in a day, or 4 dresses in a day.

1. Write down his production possibilities frontier equation, and then graph it.
2. Explain what the line itself represent, what the area under the line represents, and what the area above the line represents.

Answer 1

Andy can make 20 loaves of bread in a day, or 4 dresses in a day

At extreme cases andy can make 20 loaves of bread or 4 dresses a day, he can also produce any combination of the two.

The algebraic formula for a production possibilities frontier (PPF) shows the opportunity cost of one good in terms of the other. Concave PPFs show increasing opportunity costs. Straight-line PPFs show constant opportunity costs.

Opportunity cost of 1 loave of bread is 4/20 dresses = 0.2

and opportunity cost of 1 dress is 20/4 loaves of bread = 5

..

b)

Production possiblity curve is a graphical model that represents all of the different combinations of two goods that can be produced, the PPC captures scarcity of resources and opportunity costs. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up in order to get more of the other good which is shown by the slope of the PPC.