NaimExplain

Assume that two products are being produced: benches and chairs.  Create a table that illustrates constant opportunity costs in the production of these two goods.  Draw a production possibilities frontier (PPF) based on the data in your table and explain the condition necessary for a PPF to exhibit constant opportunity costs. ANS: The following table illustrates constant opportunity costs: Benches Chairs 0 160 10 120 20 80 30 40 40 0 The PPF associated with this table would be a downward-sloping straight line with one axis labeled “Benches” and the other axis labeled “Chairs”.  The opportunity cost in this example is a constant rate of 4 chairs forfeited for every one bench produced.  In order for a PPF to exhibit constant opportunity costs, the resources used to produce the products must be equally well-suited to the production of both products.

Explain how a technological advancement in one sector of the economy can lead to a change in the number of people who work in another sector of the economy.  Give an example to help support your answer. ANS: A technological advancement in one sector of the economy can lead to fewer people being needed to produce the goods in that sector.  This will release people from that sector and allow them to take jobs in other sectors of the economy.  This is what happened in the farming industry during the 20th century.  As more and more farming tasks that had once been performed by people were being performed by machinery and computers, the former farmers were then free to find jobs in fields such as manufacturing and service industries.

Explain what productive efficiency means.  Describe how productive efficiency is represented by a PPF. ANS: An economy is producing efficiently if it is producing the maximum amount of output with a set amount of resources and technology. Efficiency is represented by all of the points that lie along the PPF.

Using your own words, describe the law of increasing opportunity costs.  Be sure to explain why this phenomenon occurs and how it helps to contribute to the shape of the production possibilities frontier. ANS: People (and other resources) have varying abilities when it comes to producing a given product which results in a non-constant opportunity cost. Those resources that are better suited at making the product will have a lower opportunity cost than those who are less-suited.  As more of a product is produced, it becomes increasingly more difficult to find resources that are well-suited to producing that product.  Therefore, the opportunity cost of producing more units grows as additional units are produced. and the PPF becomes steeper and steeper.  The result is that the PPF is typically bowed-outward due to the law of increasing opportunity costs.

Why is the production possibilities frontier (PPF) typically bowed-outward? Under what circumstances would the PPF be a straight line? ANS: The PPF is typically bowed-outward due to the law of increasing opportunity costs. As more of a product is produced, it becomes increasingly more difficult to find resources that are well-suited to producing that product. Therefore, the opportunity cost of producing more units grows and the PPF becomes steeper and steeper. The PPF is a straight line when the resources used to produce the two products are perfectly interchangeable, and thus the opportunity cost of producing more units is constant.

Give a definition of an advance in technology. Suppose that you are drawing a PPF for civilian goods and military goods, describe the effect on the PPF of an advance in technology in both civilian goods and military goods.  How would the impact on the PPF be different if the technological improvement only helped in the production of military goods, but not civilian goods? ANS: An advance in technology commonly refers to the ability to produce more output with a fixed amount of resources (or the same amount of output with a smaller amount of resources). When technology advances in the production of both products the PPF shifts outward.  When technology advances in the production of military goods, but not civilian goods, the PPF shifts outward along the axis for military goods and the intercept remains constant along the axis for civilian goods.