Question

Suppose the government imposes a quota restricting the production of apples to an amount less than the market equilibrium quantity. Illustrate the situation on a production possibilities curve for fig leaves (y-axis) and apples (x-axis) and explain which condition for efficiency is violated.

Answer 1

Let me begin the answer in the following way

Production Possibility Curve

Production Possibility Curve or PPC is a curve that shows various combinations of two goods that can be produced with given technology and availability of resources. It is also known as Production Possibility Frontier. It is assumed that generally two goods are produced in an economy. In order to produce one extra unit of a product, the economy has to sacrifice the production of the other product, i.e. the production of one unit must be reduced inorder to produce one extra unit of the other product.

In the above situation the government had restricted the production of apple to produce more fig leaves which is clearly stated in the graph above. In the graph, the quantity of apples produced is taken on the x-axis and the quantity of fig leaves on the y-axis. In the given situation, the govt. had restricted the production of apple in order to produce more fig leaves. A is the quantity of apples that had been forgone or reduced in order to produce F quantity of fig leaves. In this situation, there was an increase in production of fig leaves from F to F1 and decrease in production of apples from A to A1.