Question

Suppose an economy E has a production possibility frontier characterized by the following equation:
Y = - X 2 + 400
a. Draw the PPF
b. Calculate 3 opportunity costs between 4 different points on the PPF, is it constant, or does it depend on the levels of output produced?
c. Where does the point A = (10, 250) fall? Explain what it means. Where does the point B = (15, 200) fall? Explain what it means. Where should we produce and why?
d. How can we illustrate an increase in Technology in the function?
e. What is the difference between Productive efficiency and allocative efficiency?

Answer 1

a) Given Y=--X2+400

putting vales of X=0,5,10,15,20 -----

Xgood Y good

0 400

5 375

10 300

15 175

20 0

GRAPH OF PPC-----

b) opportunity costs between 4 different points on the PPF

Marginal opportunity cost ( MOC)= change in y good/ change in x good

The graph shows that MOC goes on increasing with shifting resources from y good to x good.,so it is not constant

C) Points A&B on ppf-----

point A is inside PPF which shows underutilisation of available resources

point B is outside ppf which shows infeasible combination ,which is beyond the reach.( over utilisation)

The ppf shows the combination of both goods which can be produced out of optimal utilisation of available resources.

d)An increase in technology function

It increases the capacity to produce both x and y good and results in rightward shift of ppf

See graph----

e) Difference between productive and allocative efficiency

​​​​​​​Productive efficiency means to produce at such level of output where average cost is at its minimum point.

Allocative efficiency means to produce till such point where P= MC