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Assignment 1 - Answers - Q2, Assignments of Macroeconomics

Langara CollegeMacroeconomics

Assignment 1 Question 2 Answers

Typology: Assignments

2019/2020
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Assignment 1 – Answers – Q2
2. An economy’s production possibilities boundary is given by the mathematical expression
45 = A + 5B, where A is the quantity of good A and B is the quantity of good B.
a. If all resources in the economy where allocated to producing good A, what is the maximum
level of production for this good? What is the maximum level of production for good B?
When all the resources in the economy are allocated to producing good A, it means the
production of good B is zero. Setting B to zero in the given expression gives:
A = 45.
So, if no B is produced and all the resource in the economy are allocated to producing A, the
economy can produce a maximum 45 units of A.
Similarly, if all the resources of the economy is allocated to producing B (i.e., A = 0) then
maximum B that this economy can produce is B = 45/5 = 9 units.
b. Draw the PPB on a grid putting A on the vertical axis.
0, 45
9, 0
0
5
10
15
20
25
30
35
40
45
50
012345678910
Production of A
Production of B
Production Possibility Boundary
pf3
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Assignment 1 – Answers – Q

  1. An economy’s production possibilities boundary is given by the mathematical expression 45 = A + 5B , where A is the quantity of good A and B is the quantity of good B. a. If all resources in the economy where allocated to producing good A , what is the maximum level of production for this good? What is the maximum level of production for good B? When all the resources in the economy are allocated to producing good A, it means the production of good B is zero. Setting B to zero in the given expression gives: A = 4 5. So, if no B is produced and all the resource in the economy are allocated to producing A, the economy can produce a maximum 45 units of A. Similarly, if all the resources of the economy is allocated to producing B (i.e., A = 0) then maximum B that this economy can produce is B = 4 5 /5 = 9 units. b. Draw the PPB on a grid putting A on the vertical axis. 0 , 45 9 , 0 0 5 10 15 20 25 30 35 40 45 50 0 1 2 3 4 5 6 7 8 9 10 Production of

A

Production of B

Production Possibility Boundary

c. Suppose that the production of B is increased from 3 to 5 units and that the economy is producing at a point on the production possibility boundary. What is the associated opportunity cost per unit of good B? What is the opportunity cost per unit of good B if the production of this good were increased from 5 to 7? Short answer: The PPB given above is a straight line. (We can confirm this by rewriting the PPF to A = - 5B + 45 and comparing it with the general form for straight line equation Y = mX

  • b, where Y is renamed to A, X is renamed to B, m or slope is - 5 and b or Y-intercept is 45.). Therefore, the slope at any point on the PPB is the same and is equal to - 5 (note that the PPB can be re-written as A = - 5B + 45), which indicates the decline in A for a one-unit increase in production of B – i.e., the opportunity cost of producing one more unit of B anywhere on the PPB. Longer Answer: The production of A in this economy when 3 units of B are produced and the economy is performing on the PPB, is 30 units. If the economy is to remain on the PPB, increasing the production of B from 3 to 5 implies decreasing the production of A from 3 0 to
  1. Therefore, given that the PPB above is a straight line, for one unit increase in B, production of A should change by: ∆𝐴 ∆𝐵

The production of A in this economy when 5 units of B are produced and the economy is performing on the PPB, is 20 units. If the economy is to remain on the PPB, increasing the production of B from 5 to 7 implies decreasing the production of A from 20 to 10. Therefore, given that the PPB above is a straight line, for one unit increase in B, production of A should change by: ∆𝐴 ∆𝐵

Therefore, the opportunity cost of producing one more unit of B in this economy while it is performing on the PPB is constant and is equal to 5 units of A. In other words, one unit increase in production of B implies 5 units decline in production of A. d. In what way is this PPB different from that in the previous exercise? The opportunity cost here is constant while it was increasing in the previous exercise.