Question

Assume a country produces haircuts and shirts with inputs of labour. The country has 1000 hours of labour available. A haircut requires ½ hour of labour, while a shirt requires 5 hours of labour.
a. Construct country’s production- possibility frontier.
b. The country is faced with massive unemployment. How will the PPF be impacted? Explain and indicate on graph.
c. The country discovers new technology and moves towards automation. Justify how this will impact the PPF for the economy. Also, indicate the same through the graph.

Answer 1

a) When all labour hours are used to produce haircuts, the number of haircuts produced will be:

$Haircuts = \dfrac {1,000 \space hours}{0.5 \space hours}$

$= 2,000 \space haircuts$

When all labour hours are used to produce shirts, the number of shirts produced is given by:

$Shirts = \dfrac {1,000 \space hours}{5 \space hours}$

$= 200 \space shirts$

Connecting points:

(Haircuts: Shirts) = (0; 200) and (2,000; 0), produces the PPC labelled a below.

b) Unemployment represents underutisation of labor resources. Therefore, the PPC shifts inwards, indicating a decline in output.

The new PPC is labeled b on the diagram.

c) New technology and automation are productive efficient and cost effective. Output expands, and the PPC shifts outwards, indicating an increase in output and economic growth.

The new PPC is labeled c on the diagram.