Question

11. Use Exhibit 2. Which of the following statements is (are) correct?

(x) The opportunity cost of the first 50 tanks is 360 cars and the opportunity

cost of the first 360 cars is 10 tanks.

(y) If the economy chose to produce 80 tanks and 720 cars instead

of 50 tanks and 1,080 cars, then the opportunity cost of the 30

additional tanks is 360 cars.

(z) The opportunity cost of the first car is more than 0.025 tank, but

less than 0.029 tank and the opportunity cost of the first tank is

less than 7.8 cars but more than 6.5 cars.

A. (x), (y) and (z)

B. (x) and (y), only

C. (x) and (z), only

D. (y) and (z), only

E. (x) only

12. Given the information provided in Exhibit 2, which of the following statements is (are) correct?

(x) A reduction in unemployment would allow this economy to produce 750 cars and 80 tanks.

(y) A choice to produce 720 cars and 75 tanks would reflect an inefficient amount of production.

(z) If capital is idle and unemployment of labor exists then this economy would produce less than 360 cars if it was producing 100 tanks.

A. (x), (y) and (z) B. (x) and (y), only

C. (x) and (z), only D. (y) and (z), only

E. (z) only

Exhibit 2
Production Possibilities
Tanks	Cars
110	0
100	360
80	720
50	1,080
0	1,440

Answer 1

The table would be as below.

Points	Tanks	Cars
A	110	0
B	100	360
C	80	720
D	50	1080
E	0	1440

11. The correct option would be

• A. (x), (y) and (z).

For the economy going from point E to D, it can produce 50 tanks mroe than before (first 50 tanks) and 360 cars less than before. Hence, OC of first 50 tanks is 360 cars.

For the economy going from point A to B, it can produce 360 cars more than before (first 360 cars) and 10 tanks less, meaning that the OC of first 360 cars is 10 tanks.

The OC of first 360 cars is 10 tanks, meaning that the OC of each of the first set of (360) cars is tanks, which is more than 0.025 but less than 0.029. The OC of first 50 tanks is 360 cars, meaning that the OC of each of the first set of tanks is cars, which is more than 6.5 and less than 7.8 cars.

Thus, all of the statements are correct.

12. The correct option would be

• A. (x), (y) and (z).

Supposing that economy is producing at point C, producing 80 tanks and 720 cars. If the unemployment is further reduced, meaning that the labor increases, then economy would produce more than 80 tanks, 720 cars or both. Hence, for a particular reduction in unemployment, the economy may produce more than 720 cars, thereby producing 80 tanks.

At point C, the economy's at full employment and produces 80 tanks and 720 cars. If economy is producing less than that, then the economy's not at full employment, and hence, producing 75 tanks with 720 cars reflects inefficient point of production. In general, for given PPF at full employment, the producing more than any point in PPF is impossible point of production and producing less than any point in PPF is inefficient point of production.

The idle capital and unemployed labor means that the economy is not at its full employment. As stated, PPF is the combinations of production taking place at full employment. Hence, if economy is at less than full employment, then it would produce less tanks and cars than at point B (or indeed any of the point).