Question

Following is a production possibilities table for two goods: Trucks and mobiles. The table is constructed using the usual assumptions.

Choices	Trucks (T)	Mobiles (M)	The opportunity cost for trucks
A	0	110
B	1	105
C	2	96
D	3	84
E	4	63
F	5	36
G	6	0

1. What are the assumptions of drawing the PPF or PPC?

2. What are the shift factors of the PPF or PPC?

3. What is the opportunity cost of 3^rd and 5^th of trucks? Is the opportunity cost increasing or decreasing or fixed?

  

4. Determine If you have the following choices:

(3 T, 80 M), (4 T, 84 M), (7 T, 40 M), (2 T, 96 M)

Determine If these choicesare attainable, unattainable, efficient, or inefficient and why?

       

E. If the economy started to use new technology in Mobiles production. What will happen to the production possibilities curve (PPC)?

( please solve it in clear way)

Answer 1

A production possibility curve can be defined as a curve which shows various combiantions of two commodities that can be produced with the available resources in an economy during a specific period of time.

Following are the important assumptions of drawing productin possibility curve.

* Only two goods are produced in different proportions in an economy.

* The same resources can be used for the production of both the commodities and resources can be freely shifted from the production of one commodity to the other.

* The amount of resources are fixed. But resources can be reallocated for the production of both the commodities

* The technology used for the production of both the commodities are constant

* Fuller utilization of resources in an economy. Resource utilization is technically efficient.

A production possibility curve can be shifted outwrad or inward.

An outward shift of the production possibility curve means the output growth or economic growth.

The outward shifting factors of production possibility curve are the following

* Invention of new technology : This cause an outward shifting of PPC, beacuse it will increase the output more than before.

* Growth of resources : with the growth of resources, the economy can produce more than the previous level. eg: increase in labour force

* Discovery of new resources : Economy can increase output through the discovery of new resources. eg: discovery of new oil

* New methods of production : for example, the introduction of team work will helps to increase output

An inward shifting of the production possbility curve means unemployment of resources

The inward shifting factors of PPC are the following

* Resource run out: The exhaustion of non renewable resources will cause the decrease of the level of output

* Natural disasters like tsunami will cause the inward shifting of production possibility curve.

The opportunity cost of producing one truck is the amount of mobiles that has to be given up to produce an additional unit of truck

The opportunity cost of producing 3rd unit of truck = (96-84)÷1 = 12 units of mobile

The opportunity cost of producing 5th unit of truck = (63-36)÷1 = 27units of mobiles

Therefore the opportunity cost is increasing.

All the points on the production possibility curve are efficient and attainable which utilizes the given resources.

All the points below the production possibility curve are attainable but inefficient which is in unemployment

All the points above the production possibility curve is unattainable.

* The choice of 3T and 80 M : It is attainable but inefficient. Because it is possible to produce 3Trucks with 84Mobiles. But only 80 units are producing. Therefore it is a point below the PPC

* 4T, 84M : It is unattainable. Because only 63 mobiles is possible to produce with 4 trucks. It is a point above the production possibuility curve which is unattainable with the available resources

* 7T, 40M : It is unattainable because, with the available resources, it can produce a maximum of 6 trucks by produce nothing of mobiles. It is beyond the production possibility curve.

* 2T, 96M : this is efficient and attainable. Because it is on the production possibiity curve.

If the economy started to use new technology in mobile production, the production of mobiles will increase. Then production possibility curve will rotate as shown in the following graph.

In the diagram, x axis and y axis represents trucks and mobiles respectively.

Initially, the economy can produce 110 mobiles or 6 trucks. The use of new technology in the mobile production leads to the increased production of mobiles and PPC will rotate right. Now the economy can either produce more than 110 mobiles(exact amount is not mentioned) or 6 trucks.