Question

2.  Given the following production possibilities table for war goods (missiles) and civilian goods (automobiles), answer the next four questions.  (4 points)

Types of Production	Production Alternatives
	A	B	C	D	E
Auto (in million)	0	2	4	6	8
Missiles ( in thousands)	30	27	21	12	0

a. Is the PPC a linear line or a curve? Why so?

Note: You may draw the PPC for your own, but no need to submit the graph for this assignment.

b. If the economy is currently at point (or alternative) B, what is the opportunity cost of producing 2 million moreautos?

c. Suppose that the economy is operating at a point inside the curve (PPC), not on the curve.  What does it mean?  Why does it happen?

d. If there is an increase in economic resources, what would happen to the production possibilities curve?

3. Indicate what happens in the denim jeans market if the following occurs? (Your answer should be one of the following: increase in demand, decrease in demand, increase in supply, decrease in supply, increase in the quantity demanded, decrease in the quantity demanded, increase in the quantity supplied or decrease in the quantity supplied. For some questions, there may be two possible answers, but listing only one is acceptable).  Make sure to justify your answer (explain why). (4 points)

a. the new technology that cuts the time to manufacture a pair of denim jeans
b. a rise in the price of a pair of denim jeans
c. a fall in the price of the cloth, used in the production of denim jeans
d. a fall in the price of denim skirts

Answer 1

2)

A)

PPC is a concavely curved line. The slope of the PPC increases as more and more Autos are substitutes for Missiles.

Due to Law of Diminishing returns, the extra output of auto diminishes as more resources are allocated to it. Hence to produce an additional million of auto more and more of missiles production have to be sacrificed. Thus the opportunity cost measured in missile terms increases

B)

If the economy is at Point B, it produces 2A and 27 M. To produce additional 2A, the economy has to reduce the production of the missile from 27M to 21M, thus by 6M. Hence opportunity cost of additional 2A is 6M.

C)

If the economy is operating inside PPF it means that there are resources lying unused in the economy. Thus the output of both the goods can be increased simultaneously if the resources are put to use.

D) Increase in economic resources will cause an outward shift of the PPC. As more resources are now available, more of both the goods can be produced and hence the Production Possibility set will expand causing PPC to shift outward.

2)

A)

Increase in quantity supplied: As with the new technology the time to manufacture a pair of denim has been reduced, greater number pair of denim jeans can be produced with the given time and resources. This will induce the producers to increase the supply of denim jeans.

B)

A decrease in quantity demanded: Since the denim jeans price has increased consumers will reduce their demand and will look for other alternatives. Thus overall there will be a fall in market demand.

C)

Increase in quantity supplied: Decrease in the price of raw material will reduce the cost of production of denim jeans. This will induce the producer to increase the supply as it has become cheaper to produce and supply more denim jeans.

D)

A decrease in quantity demanded: As denim skirts and denim skirts are substitute goods, a decline in the price of denim skirts will make consumers to demand more of skirts and less of jeans. Hene this will cause a decline in demand for jeans.

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