ECON 202 Ch 2

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1. Specialization and production possibilities Suppose Bulgaria produces only camcorders and digital cameras. The resources that are used in the production of these two goods are not specialized—t ... hat is, the same set of resources is equally useful in producing both digital cameras and camcorders. Stated differently, how much of one good that has to be given up to get another good is always the same. The shape of Bulgaria’s production possibilities frontier (PPF) should reflect the fact that as Bulgaria produces more digital cameras and fewer camcorders, the opportunity cost of producing each additional digital camera remains constant . The following graphs show two possible PPFs for Bulgaria's economy: a straight-line PPF (PPF11) and a PPF that is bowed-outward (PPF22). Based on the previous description, the tradeoff Bulgaria faces between producing digital cameras and camcorders is best represented by Graph 1 . 2. The opportunity cost of shifting production choices The following graph shows the production possibilities frontier (PPF) of an economy that produces drinking water and oil. The black points (cross symbols) represent three possible output levels in a given month. (Hint: You can click on the points to see their exact coordinates.) Refer to the following graph to answer the questions that follow. Suppose the economy initially produces 12 million gallons of drinking water and 500,000 barrels of oil, which is represented by point A. The opportunity cost of producing an additional 4 million gallons of drinking water (that is, moving production to point B) is 80,000 barrels of oil. Suppose, instead, that the economy currently produces 420,000 barrels of oil and 16 million gallons of drinking water, which is represented by point B. Now the opportunity cost of producing an additional 4 million gallons of drinking water (that is, moving to point C) is 120,000 barrels of oil. Comparing your answers in the two previous paragraphs, you can see that the opportunity cost of 4 million additional gallons of drinking water at point B is greater than the opportunity cost of 4 million additional gallons of drinking water at point A. This reflects the law of increasing opportunity costs . 3. Shifts in production possibilities Suppose Canada produces two types of goods: agricultural goods and capital good. The following graph shows its current production possibilities frontier (PPF) for corn, an agricultural good, and construction vehicles, a capital good. On the following graph, adjust the production possibilities frontier (PPF) to show the effects of a long drought that reduces the amount of water available for farmers to use for irrigation. Hint: Select either end of the curve on the graph to make the endpoints appear. Then drag one or both endpoints to the desired position. Points will snap into position, so if you try to move a point and it snaps back to its original position, just drag it a little farther. 4. Opportunity cost and production possibilities Cho is a skilled toy maker who is able to produce both trucks and drums. She has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of her time. Suppose Cho is currently using combination D, producing one truck per day. Her opportunity cost of producing a second truck per day is 2 drums per day. Now, suppose Cho is currently using combination C, producing two trucks per day. Her opportunity cost of producing a third truck per day is 5 drums per day. From the previous analysis, you can determine that as Cho increases her production of trucks, her opportunity cost of producing one more truck increases . Suppose Cho buys a new tool that allows her to produce twice as many trucks per hour as before, but it doesn't affect her ability to produce drums. Use the green points (triangle symbol) to plot her new PPF on the previous graph. Because Cho can now make more trucks per hour, Cho's opportunity cost of producing drums is higher than it was previously. Susan is a skilled toy maker who is able to produce both trains and balls. She has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of her time. On the following graph, use the blue points (circle symbol) to plot Susan's initial production possibilities frontier (PPF). Suppose Susan is currently using combination D, producing one train per day. Her opportunity cost of producing a second train per day is 3 balls per day. Now, suppose Susan is currently using combination C, producing two trains per day. Her opportunity cost of producing a third train per day is 4 balls per day. From the previous analysis, you can determine that as Susan increases her production of trains, her opportunity cost of producing one more train increases . Suppose Susan buys a new tool that allows her to produce twice as many trains per hour as before, but it doesn't affect her ability to produce balls. Use the green points (triangle symbol) to plot her new PPF on the previous graph. Because Susan can now make more trains per hour, Susan's opportunity cost of producing balls is higher than it was previously. Ana is a skilled toy maker who is able to produce both cars and [Show More]

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