Remember: "Graph" or "illustrate" requires that you label all axes, curves, and points as
indicated. If there is some type of shift, use an arrow to indicate direction of the change.
"Calculate" means you must show your work.
A country is at full employment and produces only consumer goods and capital goods. If
it produced only consumer goods with all its available resources, it could make 250
million units. If it produced only capital goods, it would produce 50 million units.
•
Graph the production possibilities curve for this country, assuming constant
opportunity cost between the two types of goods. Place capital goods on the
vertical axis and consumer goods on the horizontal axis. Indicate a point on your
graph, labeled X, that represents full employment and a possible combination in
which both goods are being produced.
Capital Goods
50 million
Z
X
Consumer Goods
250 million
•
What is this country's opportunity cost for producing a consumer good? Explain.
A: The opportunity cost for producing a consumer good can be calculated by
dividing 50 million (capital) by 250 million (consumer). This results in 0.2, which
indicates that the opportunity cost for producing one consumer good is 0.2 capital
good.
•
Assume that the country is working beyond its sustainable productive capacity. In
which area—on the PPC, inside the PPC, or outside the PPC—is this country
producing?
A: If a country is working beyond what is sustainable in terms of productive
capacity, the country is outside of the PPC.
•
The production level from part (c) leads to a breakdown in several resources and
plunges the economy into recession. Indicate a point that would correspond to this
on your graph and label it Z.
•
Assume that there is an improvement in technology that a ects production of both
consumer and capital goods. Illustrate the impact of this change on your graph
from part (a). Use an arrow to indicate the direction of the change.
•
Another country with constant opportunity cost can produce 200 million units of
consumer goods with all of its available resources or 100 million units of capital
goods with all of its available resources. Calculate the opportunity cost for this
country to produce 50 million units of capital goods.
ff
The opportunity cost for the country to produce 1 unit of capital good is 200 million/100
million = 2 units of consumer goods. Therefore, we can multiply that by 50 million,
resulting in the opportunity cost of 100 units of consumer goods.