QUESTION 4: Use production possibilities curves to illustrate each of the following (putting goods on the...

QUESTION 4: Use production possibilities curves to illustrate each of the following (putting goods on the vertical axis and services on the horizontal axis)

a) A shift in production from services towards goods

b) An increase in the potential output of the economy due to a greater availability of factors of production.

c) An increase in productivity in the services sector.

d) A decrease in productivity in the goods sector.

Solutions

Expert Solution

In the production possibility curve the goods are being plotted on the vertical axis and services on the horizontal axis.

a) A shift in the production from the services to the goods sector will lead to a change in point nearing the horizontal axis to the point nearing the vertical axis as services sector is in the horizontal axis and goods sectors in vertical axis. The initial point was point A which later shifted to point B.

b) An increase in the potential output of the economy due to greater availability of factors of production will lead to a rightward shift of the production possibility curve. As the potential of the resources have been increased which will lead to an overall increase in the production of both the goods. The shift of the curve will be towards right. The first curve was PPC1 which later shifted to PPC2.

c) An increase in the productivity in the services sector will lead to an increase of the production of services which will thereby shift the corner point of the services further rightward. However, the corner point of the goods sector will remain the same.

d) A decrease in the productivity in the goods sector will decrease the production of the goods sector. This will lead to a downward shift of the corner point of the goods sector. However, the corner point of the services sector will remain the same.

The diagrammatic representation of the questions are given below with the labels (a),(b),(c) and (d) representing each question.

Rahul Sunny answered 1 year ago

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