The country of Nelsonia produces tanks and trucks. The table below shows five of the possible choices for Nelsonia. Tank production is measured in thousands per year and truck production is measured in millions per year.
- On the grid to the right, plot the production possibilities frontier (PPF) for Nelsonia.
- Pick any point inside the curve and label it M. What does point M represent?
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This represents the point where the country is producing 24,000 trucks and 4 million tanks. At this production level, the country is not fully utilizing its resources.
- If the people of Nelsonia are currently choosing point M, what is the opportunity cost of another truck? Explain!
At this point, the opportunity cost of another truck is zero since the country is operating under its capacity and has spare resources. It can thus produce another truck without foregoing production of any tanks.
- Pick any point outside the curve and label it N. What does this point represent?
This point represents a production combination in which the country is producing 40,000 tanks and 6 million trucks. This point is beyond the Production Possibility Frontier so it is not possible for the country to produce at this point.
- Pick any point on the curve and label it X. What does this point represent?
This point represents a production level at which the country is fully utilizing its resources and has no extra capacity. It will have to forego the production of either kind of unit to increase the production of the other
- If the people of Nelsonia are currently choosing point C, what is the opportunity cost of:
- two million more trucks? - 18 thousand tanks
- six thousand more tanks? - 1 million trucks
- As the production of tanks increases from 0 to 60 thousand, what happens to the opportunity cost of producing a tank? Does it increase, decrease, or stay the same? How do you know?
It increases, since as we move from the production of 0 tanks to 69 thousand tanks, we have to forego the production of more and more trucks. This is also evident from the slope of the production possibility frontier which continually decreases as we move from 0-60.
- Suppose a new technology is developed by firms that make tanks so that it now takes fewer resources to make a tank. Show the effect of this change on the PPF.
- What are the fundamental choices that must be made in any economic system?
The Fundamental choices that are needed to made in an economy are:
- What to produce?
- How much to produce?
- How to distribute that produce?
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