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Assignment 1 – Answers – Q
- In an economy there are only two consumer goods: Gizmos and Widgets. Only labour is required to produce both goods, and the economy’s labour force is fixed at 1 2 0 workers. The table below indicates the daily outputs of Gizmos and Widgets that can be produced with various quantities of labour. Number of Workers Daily Gizmos Production Number of Workers Daily Widgets Production 0 0 0 0 30 15 30 150 50 30 50 300 70 40 70
a. Draw the Production Possibility Boundary (PPB) for this economy using a gird with Widgets on the vertical access, assuming full employment in this economy. ( 0 , 475 ) ( 15 , 450 ) ( 30 , 400 ) ( 40 , 300 ) ( 45 , 150 ) (47.5, 0 ) 0 50 100 150 200 250 300 350 400 450 500 0 5 10 15 20 25 30 35 40 45 50 Widgets Gizmos
Production Possibility Boundary
b. What is the opportunity cost of producing the first 15 Gizmos? What is the opportunity cost of producing the next 15 Gizmos (i.e., from 15 to 30 )? What happens to the opportunity cost of Gizmos as their productions is continuously increased? The opportunity cost of producing the first 15 Gizmos is 25 Widgets. The opportunity cost of producing the next 15 Gizmos (from 15 to 30) is 50 Widgets. As the production of Gizmos continues to increase, their opportunity cost also increases. c. Suppose that actual production levels for a given period were 15 Gizmos and 150 Widgets. What can you infer from this information? With actual production of 15 Gizmos and 150 Widgets, this economy is not performing on its PPB. This combination of products places this economy within the production possibility area away from PPB, which implies that there is unemployment (60 workers) in this economy. d. Continuing from part (c), what is the opportunity cost of moving from the production combination of “15 Gizmos and 150 Widgets” to “15 Gizmos and 450 Widgets”? [Hint: think twice, the answer might not be as straight forward as it may seem at first!] Producing 15 Gizmos requires employing 30 workers. Producing 150 Widgets requires employing 30 workers. In other words, the production combination “15 Gizmos and 150 Widgets” employs only 60 workers in this economy altogether. 60 workers remain unemployed. Increasing the production of Widgets from 150 to 450 would need employing 60 more workers, essentially all those who are unemployed, without any impact on production of Gizmos since there was enough unemployed workers in the economy. It seems like producing 3 00 more of Widgets (the difference between 150 and 450) involves no trade-off; zero opportunity cost! But, notice that the 60 unemployed workers could have been employed in the Gizmos industry to produce 30 more Gizmos and bring the economy’s production of Gizmos from 15 to 45 units. When the economy moves to “15 Gizmos and 450 Widgets” the combination “ Gizmos and 150 Widgets” is not an option anymore. If “45 Gizmos and 150 Widgets” was the best alternative to “15 Gizmos and 450 Widgets”, then the opportunity cost of moving from “15 Gizmos and 150 Widgets” to producing “15 Gizmos and 450 Widgets” is not having 30 more Gizmos (for having 300 more Widgets). This is a more complex way of defining the opportunity cost. Notice that this is not a movement along the PPB, but rather moving from under the PPB to a point on the PPB. At the presence of limited available resources, the opportunity cost of choosing a specific allocation of resources among competing needs (production of Gizmos and Widget in this
