Q&A > Macro Topic 1.2 The Production Possibilities Curve.

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Macro Topic 1.2

The Production Possibilities Curve Part 1 - Check Your Understanding​- ​The economy of Macrostan can produce only two goods: chips and pretzels. At any given period of time, the people of Macrostan may choose to produce only chips, only pretzels, or a combination of the two according to the table below.

1. Can the economy of Macrostan produce 15 bags of chips at the same time that they produce 25 bags of pretzels? Why or why not?

No. This is because for every 2 bags of chips produced, there is a decrease in 10 bags of pretzels. Therefore, based on the data for 14 and 16 bags of chips, if we produce 15 bags of chips, we can only produce 10 bags of pretzels at the same time.

2. Identify a specific combination of chips and pretzels that would represent an inefficient use of Macrostan’s resources. Explain.

10 bags of chips and 30 bags of pretzels would be an inefficient use of Macrostan's resources. This is because these values lie under the possibility curve.

3. Assume that Macrostan produces at combination A. Is that combination efficient or inefficient? Why or why not?

It is efficient. This is because these values lie on the possibility curve and therefore can be deemed efficient.

6. Calculate the opportunity cost if Macrostan switched from producing combination A to producing B. 10 bags of pretzels 7. Calculate the opportunity cost if Macrostan switched from producing combination B to producing C. 10 bags of pretzels

Pretzels (Bags)

4. How would a technological change that increases the production of only pretzels affect the production of chips? Explain.

A technological change that increases the production of only pretzels would mean that the production of chips would greatly decrease. This is because as the amount of pretzels increases, the amount of chips decreases, and vice versa 5. Use the numbers in the table to draw a production possibilities curve on the graph to the right. Be sure to label the axes and each combination (A-E).

8. Suppose that Macrostan is producing combination C. Show what will happen on the graph if there is a decrease in demand for chips​.

Chips (Bags)

Video Help: ​https://youtu.be/4UbKAlMTL7c​ ​

​©Copyright Jacob Clifford 2020. ​www.ACDCecon.com Annual license required. Do not use unless you have purchased a license This study source was downloaded by 100000859607764 from CourseHero.com on 01-06-2023 11:21:27 GMT -06:00 https://www.coursehero.com/file/93319828/12-Opportunity-Cost-and-the-PPC-WSpdf/

Macro Topic 1.2

The Production Possibilities Curve Part 2 - Practice​- ​Assume that the economy of Econland can produce robots (capital goods) and toy drones (consumer goods). Use the table below to answer the questions.

9. Use the numbers in the table to draw a production possibilities curve on the graph to the right. Be sure to label the axes and each combination (A-E).

Drones

10. Calculate the opportunity cost if Econland switched from producing combination A to producing combination B. 5 drones.

11. Assume that robots are capital goods. On your graph, show the long-term effect of a technological improvement that increases the production of robots. Explain.

If there was a technological improvement that increased the production of robots, both the robots and the drones would increase since the relationship between the drones and the robots is linear. It would cause the entire line to shift upwards 12. Assume the economy of Econland intentionally decides to produce combination D rather than combination B. What is the short term result and long-run trade-off of this decision? Explain.

The short term result is that less consumer goods will be made and more capital goods will be made. The long-run trade off of this decision would lead to an increase in both the capital and consumer goods in the future.

Robots

Part 3 - Making Connections​- ​Compare the production possibilities of Macrostan and Econland to answer the following questions.

13. Which of the two economies represents the idea of constant opportunity cost? Explain.

Econland. This is because the rate of production in regards to the capital goods (robots) and consumer goods (drones) remains constant.

14. Which of the two economies represents the idea of increasing opportunity cost? Explain.

Macrostan. This is because as either the pretzel or chip productions increase, the other decreases because they cannot be made simultaneously. Therefore the opportunity cost increases.

15. Assume that your classmate suggested that both graphs represent constant opportunity costs because movement from combinations A to B, B to C, and C to D stays the same for each economy. Explain why this is incorrect.

This is incorrect because while both economies have graphs that feature declining lines, what they each represent is different from one economy to the other. One has an increasing opportunity cost while the other has a constant opportunity cost which can be easily identified through the shape of the curve/line.

Video Help: ​https://youtu.be/4UbKAlMTL7c​ ​

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