Question

Find the opportunity cost in moving from B to C.                                                     (1 mark)

Point	Output of mops	Output of brooms
B	50	0
C	30	25

2. The economy strives to shift from PP1 to PP2. Discuss ways in which the economy reach PP2.                                                                                                                                    

3. Assume that at A, the economy can produce 10 mops and 10 brooms. Is it economically efficient? Why?                                                                                

Answer 1

1) The opportunity cost would be the number of mops given up in order to produce more brooms.

So an economy produces 25 more brooms and gives up 20 mops.

The opportunity cost of 1 more broom would be 20/25 mops= 0.8 mops

Hence the opportunity cost from B to C is giving up 20 mops in order to produce 25 brooms.

2) The economy when shifts from PP1 to PP2, it could be either ways:

It can move out ie PP2 is outside PP1 and this means that overall the economy has seen technological advancement, there has been better use of this technology and people have been able to produce more of both goods and hence the economy is better off than it was before.

PP2 can be to left of PP1 ie the economy has reduced the production. This could be due to obsolete technology, or a natural calamity which destroyed the resources and labor force and hence the economy is worse off.

Since here the economy has strived to reach to PP2, we are assuming that the economy has moved rightwards and there has been technological advancement.

3) No, this is not economically efficient. This is because point A would not lie on the PPF curve. Both broom and mops are in less number than B . This implies that it lies somewhere inside the PPF and not on it. Hence point A would not be economically efficient.

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