Question

home / study / business / economics / economics questions and answers / suppose you are an economic adviser to governor of california. the state has a fixed budget ... Question: Suppose you are an economic adviser to governor of California. The state has a fixed budget and i... Suppose you are an economic adviser to governor of California. The state has a fixed budget and is considering allocating more funds to build more prisons or to improve K-12 education infrastructure. Using the production possibilities frontier, explain to the governor why he cannot build more prisons and improve K-12 education infrastructure. Use PPF terminology in your explanation.

Answer 1

Fixed budget here refers to fixed resources owned by the state of California . Here the two goods are : Prisons and K-12 education infrastucture . The funds needs to be allocated among these two goods . But improving education and also building more prisons cannot occur at the same time since there is a budget constraint . Devoting a part of the budget more to one good would mean reducing production of another good . This is known as the the tade off or opportunity cost of producing on the Production possibility frontier . So both goods cannot be increased simultaneously .

Suppose the productin point is at A , it is efficient point of production . The funds are utilized fully at this point . Beyond the PPF , point B is not feasible .