Question

Q3. Given the following Production Possibilities Schedule for a hypothetical economy in year 1.

            ___________________________________________

            Capital Goods                         Consumption goods

            ___________________________________________

                        5                                              0

                        4                                              10

                        3                                              18

                        2                                              24

                        1                                              28

                        0                                              30

            ___________________________________________

1. What is the opportunity cost for each unit of capital goods? Does the principle of increasing opportunity costs exist? Explain.
2. Is it possible to produce 18 units of consumption goods and 2 units of capital goods? Explain.
3. Draw the production possibilities frontier for this economy. Explain why it took the shape you drew?
4. If the new level of technology improves the production of both capital and consumption goods, draw the new production possibilities frontier (PPF)?

Answer 1

a) The opportunity cost for a given unit of capital good is the amount of consumption goods not produced. The same is provided in the table below. Note that this cost is increasing with each additional unit of capital goods produced so that we experience the principle of increasing opportunity costs.

Capital Goods	Consumption Goods	Opportunity cost
5	0	10
4	10	8
3	18	6
2	24	4
1	28	2
0	30

b) It is possible to produce 18 units of consumption goods and 2 units of capital goods because when 18 units of consumption goods are produced, the nation has enough resources to produce 3 units of capital goods

c) The production possibilities frontier for this economy is drawn below. Its shape is concave to the origin/bowed out because of increasing opportunity cost of producing 1 good in terms of the other.

d) If the new level of technology improves the production of both capital and consumption goods, the new production possibilities frontier will shift out from both sides.