Question 19
a) As the table shows, there are only 250 workers in Choiceland, and to construct the production possibilities boundary (PPB) we must imagine all the combinations of workers in each sector. Using the two middle columns from the table, we can plot the output levels on a graph to get the following PPB:
b) If the economy is already producing 45 units of X and 900 units of Y, then 15 extra units of X can only be produced by reducing the production of Y by 300 units. The opportunity cost of 15 units of X is therefore 300 units of Y (or 300/15 = 20 units of Y per unit of X). If the economy is already producing 60 units of X (and 600 units of Y), the opportunity cost of producing an additional 15 units of X is the full 600 units of Y that must be given up. This implies an opportunity cost of 600/15 = 40 units of Y per extra unit of X. Thus, we see that the opportunity cost of X rises when more of X is already being produced.
c) If the economy is producing 40 units of X and 600 units of Y, then either some resources are not being used or they are being used inefficiently; the economy is operating inside the production possibilities boundary. It would thus be possible to improve the use of resources and increase output of X by 20 units without reducing the output of Y at all. In this sense, the extra output of X has no opportunity cost in terms of forgone units of Y.
d) If any given amount of labour can now produce 10 percent more of good Y, then the PPB shifts up in a particular way. Specifically, the Y values increase by 10 percent for any given X value, as shown below.
Question 20
a) It doesn’t matter how the two axes are labelled in this case; just label them X and Y. The long civil war destroys much of the country’s infrastructure and likely reduces the country’s ability to produce all products. So the PPB shifts inwards, as shown below in part (a) of the figure.
b) The axes are now labelled Food and Clothing. The new technology doubles the maximum amount of food that can be produced, and so shifts the PPB outward in the manner shown in part (b) of the figure. Note that the vertical intercept (maximum amount of clothing) does not change.
c) The axes are again labelled Food and Clothing, as in part (c). In this situation, the earthquake destroys many clothing factories and so shifts the PPB inward, reducing the maximum possible amount of clothing (but leaving unaffected the maximum possible amount of food).
d) The axes are labelled X and Y, as shown in part (d) of the figure. The immigration increases the labour force and increases the country’s ability to produce all products. The PPB shifts outward, increasing the maximum possible amounts of both X and Y. Since the new level of immigration is occurring each year, every year will see such an outward shift in the PPB.
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