Question

1. Below is the production possibilities table for the country of Lavaland.    (8 Points)

Choice                       Number of tanks                  Number of pizza

A                                       0                                            15

B                                       4                                            14

C                                       7                                            12

D                                       9                                             9

E                                       11                                           5

F                                       12                                           0

1. If the economy starts at point A with production of 0 tanks and 15 pizza

• What is the opportunity cost of producing 4 tanks more?

• What is the opportunity cost of one tank more? Show you calculation to receive full credit.

2. What is the opportunity cost of one tank more if this economy moves from point D to point E on its PPF? Show your work.

3. Refer to your answers above, this economy relevant production possibilities frontier shape should be: (Fill-in the parenthesis with letter X to mark your answer and explain your choice).

Straight line …………………………………………………………………. (             )

Bowed out……………………………………………………………………. (              )

Upward sloping straight line…………………………………………..(              )

Concave to the point of origin…………………………………………(              )   

4. If the Lavaland economy is currently producing 7 tanks and 9 pizzas, what would you conclude about its production level? The production level is: (Mark your choice of answer with X)

• Not attainable ……………………………………………………………….. (           )

             

• Efficient……………………………………………………………………………(             )

• Attainable and inefficient…………………………………………………(             )

• Attainable and efficient……………………………………………………(              )

                

5. If a new technology is introduced in the production of both goods, how this economy initial PPF would be affected by this event? Fill-in the parenthesis with letter X to mark your answer.

The PPF would shift inside………………………………………………………(                  )

The PPF would stretch along its horizontal axis………………………(                  )

The PPF would shift to the right……………………………………………..(                  )

The PPF would stay the same…………………………………………………(                  )

Answer 1

a) The opportunity cost of producing 4 tanks is 1 pizza.

Because to increase the Production by 4 tank we need to sacrifice 1 pizza.

The opportunity cost of producing 1 tank is 0.25(1/2) pizza.

Because when we move from point A to B to increase 1 unit of pizza we sacrifice 4 unit of tank. It mean 1 tank = 1/4(0.25) pizza.

b. The opportunity cost of 1 more tank is 2 pizza

Because while moving from point D to E to increase the production of tank by 2 units we need to sacrifice 4 unit of pizza. It means the opportunity cost of increase 1 tank is to sacrifice 2 unit of pizza.

c. The opportunity cost is bowed out shape.

PPF is bowed out shaped because of increasing marginal opportunity cost. It means more and more units of commodity are sacrificed to gain an additional unit of another commodity.

In the above diagram we need to sacrifice more and more pizza to increase the production of tank.

d. The correct answer is attainable and inefficient.

Because the actual Production can fall short of its capabilities. If there is wastage or inefficient utilisation of resources, then economy will operate at any point inside the PPF.

E. The correct answer is The ppf would shift to right.

Because when there is advancement of technology in respect to both goods, then PPF will shift to the right.