Question

Two countries, Sunnyland and Moderna, share the same production possibility frontier (curve). Plot food on the vertical axis and tractors on the horizontal axis. Label the production alternatives A, B, D, D, E, and F on the curve.

Production Alternatives	Tractors (thousands)	Units of Food (millions)
A	0	8
B	1	7.5
C	2	6.5
D	3	5.0
E	4	3.0
F	5	0.0

b.     On the same figure, label as point U the production of 3 thousand units of tractors and 3 million units of food. Label as point H, the production of 6 thousand units of tractors and 3.5 million units of food. What do points U and H indicate? When is production efficient?

c.      Sunnyland produces at point B and Moderna produces at point E; which country consumes more of its current output? Which country invests more of its current output? Which country is expected to grow faster?

d.     Sunnyland would like to change its production and move from point B to point C. What is the opportunity cost associated with this decision?

e.     New farming techniques allow both countries to increase the production of food by 20% holding the production of tractors constant. What are the new production levels? Using the same graph as before, draw the new production possibility curve.

Answer 1

a. See the PPF below. Food on vertical axis and tractors on horizontal axis

b. Point U is sub-optimal as it is inside the PPF and point H is unattainable as it outside the PPF. A point is efficient if it is on the PPF

c. Since tractors are more like investment (they lead to increase in productive capacity), and Moderna is at a point where the production of tractors is higher than that on point B, Moderna is expected to grow faster and Sunnyland consumes more of its output

d. From point B to C, the increase in tractor production is 1,000 units and the reduction in food production is 1 million units, the opportunity cost per tractor is 1,000 units of food (1 million / 1,000)

e. Pls see the new PPF below. Food on vertical axis and tractors on horizontal axis