Macroeconomics

Production Possibilities Frontier Homework

Cassady, 20304

 

 

  1. If an economy is operating inside its production possibility frontier (PPF), it must be the case that resources are unemployed.  Do you agree or disagree?
  2. Suppose that a simple society has an economy with only one resource, labor.  Labor can be used to produce only 2 commodities – X, a necessity good (food), and Y, a luxury good (music and merriment).  Suppose that the labor force consists of 100 workers.  One laborer can produce either 5 unites of necessity per month (by hunting and gathering) or 10 units of luxury per month (by writing songs, playing the guitar, dancing, and so on).
    1. On a graph, draw the economy’s PPF.  Where does the PPF intersect the Y-axis?  Where does it intersect the X-axis?  What meaning do those points have?
    2. Suppose the economy ended up producing at a point inside the PPF.  Give at least 2 reasons why this could occur.  What could be done to move the economy to a point on the PPF?
    3. Suppose you succeeded in lifting your economy to a point on its PPF.  What point would you choose?  Is it allocatively efficient?  How might your small society decide the point at which it wanted to be?
    4. Once you have chosen a point on the PPF, you still need to decide how your society’s product will be divided up.  If you were a dictator, how would you decide?  What would happen if you left product distribution to the free market?  Would this be distributively efficient?

 

  1. Assuming a country can only produce fish or meat, draw a PPF to illustrate each of the following events.
    1. Inefficient production of meat and fish.
    2. Productive efficiency.
    3. An inefficient output mix.
    4. Technological advances that improve the production of fish.
    5. The law of increasing opportunity costs.
    6. An impossible combination of meat and fish.
    7. A preference for a healthy fish diet versus meat.
    8. The government declares net fishing illegal.
    9. Steroids are proven to “fatten” cows.

 

  1. A nation with fixed quantities of resources is able to produce any of the following combinations of bread and ovens.

 

LOAVES OF BREAD (MILLIONS)

OVENS (THOUSANDS)

 

75

0

60

12

45

22

30

30

15

36

0

40

 

These figures assume a certain number of previously produced ovens are available in the current period for baking bread.

a.       Using the data in the table, graph the PPF (with ovens on the vertical axis).

b.      Does the principle of “increasing opportunity cost” hold in this nation?

c.       If this country chooses to produce both ovens and bread, what will happen to the PPF over time?  Why?

d.      A politician running for nation office wants to reallocate resource to produce the maximum possible quantity of bread, with no production of ovens.  His slogan is “You can’t eat ovens.”  If this politician is successful, explain what will happen to the production possibilities curve over time.  Why?

e.       Now suppose that a new technology is discovered that allows twice as many loaves of bread to be baked in each existing oven.  Illustrate on your original graph the effect of this new technology on the PPF.

f.        Suppose that before the new technology is introduced, the nation produces 22 ovens.  After the new technology is produced, the nation produces 30 ovens.  What is the effect of the new technology on the production of bread?