Question

In: Economics

1. A simple economy has 100 workers and produces only two goods – coffee and doughnuts....

1. A simple economy has 100 workers and produces only two goods – coffee and doughnuts. Labour is the only factor

of production, but some workers are better suited to producing coffee than doughnuts (and vice versa). The table

below shows the maximum amount of output of each good possible from various levels of labour input.

Number of workers producing coffee

100

Monthly production of coffee

(hundreds of pounds)

Number of workers producing doughnuts

100

Monthly production of

doughnuts (hundreds)

600

550

400

150

a) On graph paper, plot the production possibilities frontier for this economy.)

b) If the economy is currently producing 2000 pounds of coffee (20 hundreds) and 55 000 doughnuts (550 hundreds),

what is the opportunity cost of producing another 3000 pounds (30 hundreds) of coffee?

c) Can this economy produce 40 000 doughnuts and 4000 pounds of coffee? Explain.

d) Can this economy produce 30 000 doughnuts and 6500 pounds of coffee? Explain.

e) Suppose that the technology used to produce coffee improves so that the maximum amount of coffee produced from

any given amount of labour increases by 10%. Illustrate on graph paper what happens to the production possibilities

curve.

Solutions

Expert Solution

(a) PPF as follows.

(b) Opportunity cost = Units of donuts given up to increase production of coffee to 50000 units = 55000 - 40000 = 15000

(c) When donuts produced is 400 (hundred), maximum coffee produced is 50 (hundred), so the combination of 40000 donuts and 5000 coffee is feasible.

(d) The PPF shows that When donuts produced is 300 (hundred), maximum coffee produced is 60 (hundred), so the combination of 30000 donuts and 6500 coffee is not feasible.

(e) The PPF shifts outward as follows.

Data table:

Donut	Initial Coffee Produced	New Coffee Produced
600	0	0
550	20	22
400	50	55
150	75	82.5
0	80	88

PPF:

Rahul Sunny answered 1 year ago

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