Question

Based on the article "Sheep Give Way to Grapes in New Zealand Wine Boom" from the March 28, 2017 issue of the Wall Street Journal, respectively, please respond to the following questions:

(a)   Assume New Zealand can produce 2 goods: Sheep and Grapes for wine. Illustrate graphically the production possibilities curve for New Zealand. Put Sheep on the Y-axis and Grapes on the X-axis.

(b)   Show the effect of a change in consumer tastes toward favoring wine on the production possibilities diagram you drew in (a).

(c)    Does the Law of Increasing Opportunity Cost apply in this example? Explain.

(d) Illustrate the effect on the Production Possibilities Curve if there is an improvement in the technology of producing grapes.

Answer 1

a) See graph below for the shape of the production possibility curve (PPC). I've included the explanation for why I've used this shape in part c of this question.

b) Changing consumer tastes will not impact the PPC. It will however impact the indifference curve of the society and as a consequence, impact the optimal choice of wine and wool (from sheeps) for the economy.

Let IC show the old indifference curve for the society and IC' show the new indifference curve. Then a change in preference in favor of wine shows that the economy produces more grapes and fewer sheeps.

c) No. It doesn't apply here. Basically there is a limited amount of land. Say 100 units of land. It can either be allocated to rearing sheep or to cultivating wine. To increase 1 unit of land allocated to wine cultivation exactly 1 unit of land will have to be taken away from sheep rearing. Because this trade off is constant, and negative, we get a linear downward sloping PPC.

d) If there is an improvement in the technology of producing grapes, more grapes can be produced from the same land. This change has been shown in the graph below.