Question

microeconomics

note: briefly show how you get the result.

Assume that the table below describes the production possibilities confronting an economy. Using that information:

Potential output combinations	Convenience Stores	Homeless Shelters
A	0	22
B	1	18
C	2	13
D	3	7
E	4	0

1. Draw the production-possibilities curve. Be sure to label each alternative output combination
(A through E). (Note: put # of convenience stores on the horizontal line)

2. Calculate the opportunity cost of building the first convenience store.

3. Calculate the opportunity cost of building the third convenience store.

4. Why can’t more of both outputs be produced?

5. Redraw your diagram in (1). By assuming some resources are not used, add a new production
possibilities curve to your redrawn diagram. [your diagram needs not be precise.]

6. Redraw your diagram in (1). By assuming more resources are discovered/used, add a new production
possibilities curve to your redrawn diagram. [your diagram needs not be precise.]

7. Assuming the change in choice from D to C. calculate the opportunity cost.

Answer 1

The Production Possibility Curve gives the different combinations of the two goods that can be produced with the given resources.

2) The opportunity cost of first convenience store is (22-18) = 4 homeless shelters. To add one more convenience store, 4 homeless shelters have to be given up.

3) The opportunity cost of thrid convenience store is (13-7) = 6 homeless shelters. To add the third convenience store, 6 homeless shelters have to be given up.

4) More of both goods cannot be produced with the given resources.

5) If resources are not used fully, then PPF will shift inwards, to the left.

6) If resources improve, then PPF will shift to the right, outwards.