Answer to Question #268860 in Macroeconomics for haseeb

Question

1. Below is a production possibilities table for consumer goods (automobiles) and capital

goods(forklifts):

Type of Production Production Alternatives

A B C D E

Automobiles

Forklifts

30

2

27

4

21

6

12

8

a. Show these

data

graphically.

Upon what

specific assumptions is this production possibilities curve based?

b. If the economy is at point C, what is the cost of one more automobile? Of one more

forklift? Explain how the production possibilities curve reflects the law of increasing

opportunity costs.

c. If the economy characterized by this production possibilities table and curve were

producing 3 automobiles and 20 fork lifts, what could you conclude about its use of

available resources?

d. What would production at a point outside the production possibilities curve indicate?

What must occur before the economy can attain such a level of production?

Answer 1

(a)

This production possibilities curve is based on the assumption that only two goods, consumer goods and capital goods are produced in different proportions in the economy.

(b)

The production possibilities curve reflects the law of increasing opportunity costs such that as the economy moves along its production possibilities curve in the direction of more of a particular good, the opportunity cost of additional units of that good increases.

At point C, the cost of one more automobile will be higher whereas the cost of one more forklift will be lower.

(c)

The production of 3 automobiles and 20 forklifts will fall inside the production possibilities curve indicating that the available resources are underutilized.

(d)

Production at a point outside the production possibilities curve will indicate a combination of commodity production that will result in over utilization of resources.