Question

Suppose that a hypothetical economy which only produces food and clothing has the following production possibility schedule (table):

 

Point	Units of Food (millions)	Units of Clothing(thousands)
A	0	8.0
B	1	7.5
C	2	6.5
D	3	5.0
E	4	3.0
F	5	0.0

 

 

a. Graph the production possibility curve (PPC) with clothing on the vertical axis and food on the horizontal axis. Label the production points A through F.

b. What would be the opportunity cost of increasing production of food by 1 million if the economy was originally at Point A and moving to point B?

c. Suppose the economy is currently producing at Point D. What would be the opportunity cost associated with increasing production of food by 1 million units and moving to point E)?

d. Why are food costs increasing? That is, why is the opportunity cost of moving from D to E greater than the opportunity cost of moving from A to B?

e. On the same graph, label point U at the production of 3 thousand units of clothing and 3 million units of food. In addition, label point H at the production of 6 thousand units of clothing and 3.5 million units of food. What do points U and H indicate?

f. What is the difference between unemployed and inefficient use of economic resources?

Answer 1

a.

 

b.

The opportunity cost of moving from point A to point B would be change in Y/Change in X. Thus, opportunity cost would be (8-7.5)=0.5 units of clothing

c.

The opportunity cost of moving from point D to point E would be change in Y/Change in X. Thus, opportunity cost would be (5-3)= 2 units of clothing

 

d.

The opportunity costs of food are increasing due to increase in marginal rate of substitution (MRS). When more is produced of food, lesser units of clothing are produced as resources are limited. People are less willing to give up clothes to produce more of food andthat is, why is the opportunity cost of moving from D to E greater than the opportunity cost of moving from A to B.

e.

 

 

 

 

Point U represents the point of inefficiency or underutilization of resources while H represents infeasible point as enough resources are not available to achieve the production at point H.

 

f.

Unemployment of resources mean when the economic resources are not put to use and lie futile but inefficient use of economic resources are indicative of underutilization i.e., resources are put to use but are not used to their full potential.