Question

Question 1: We have the following information about an economy. Use this information to answer the questions below.

Table 1: Number of Cars and Bushels of Wheat Possible for an Economy to Produce Point Number of Cars (in 10,000s) Bushels of Wheat (in 100,000s)

A 0,700 B 60, 630 C 120, 530 D 180, 400 E 240, 220 F 300, 0

a) Use the information in the table to graph a production possibilities curve for this economy. Put cars on the vertical axis and wheat on the horizontal axis. Label the points A through F on the graph.

b) Using the information in the table, demonstrate/prove that this economy faces increasing opportunity cost. Explain, i.e. how much wheat must we give up each time we produce time we produce 600,000 more cars?

c) Can this economy produce the combination of 18,000,000 cars and 420,000,000 bushels of wheat? Explain.

d) What point on the curve is productively efficient for this society? Explain.

e) What point on the curve is allocatively efficient for this society? Explain.

Answer 1

b.

When we move from point F to E we produce 600,000 more cars and give up 300,000-240000=60,000 wheat.

When we move from point C to B we produce 600,000 more cars and give up 630,000-530,000=100,000

So the opportunity cost is increasing as we produce more cars.

c. No, 180,000,000 cars and 420,000000 wheat cannot be produced as there are not enough resources that might join them. This point is beyond the PPF.

d. Productively efficient points are all the points which lies on the ppf since these bundles used the productive resources Efficiently.

e. Allocative RESOURCES are all those points which maximises the utility of the whole economy. The are pareto efficient levels.