Assume an economy producing only two goods (shoes and computers) with a fixed amount of productive resources and technology and employing all its productive resources to the maximum. Production in this economy is subjected to the law of diminishing marginal returns and resources are assumed to be fully optimized. In addition, the cost of sacrificing shoes for computers and vice versa is 1. On the basis of the foregoing assumptions, answer the following questions: i. Draw the economy’s production possibility frontier on hindsight of the relevant assumption.   Why are points outside the frontier unattainable?   iii. Identify three ways by which the economy can attain the level of production outside the PPF.   What happens to the PPF when technological change overwhelmingly favours the production of computers?

Question

Assume an economy producing only two goods (shoes and computers) with a fixed amount of productive resources and technology and employing all its productive resources to the maximum. Production in this economy is subjected to the law of diminishing marginal returns and resources are assumed to be fully optimized. In addition, the cost of sacrificing shoes for computers and vice versa is 1. On the basis of the foregoing assumptions, answer the following questions: i. Draw the economy’s production possibility frontier on hindsight of the relevant assumption.

 

  1. Why are points outside the frontier unattainable?

 

iii. Identify three ways by which the economy can attain the level of production outside the PPF.

 

  1. What happens to the PPF when technological change overwhelmingly favours the production of computers?

 

  1. What happens to the PPF when the economy discovers an improved technology for producing shoes?

 

  1. Assume now that the sacrifice ratio is greater than 1, show what will happen to the shape of the production possibility frontier.

 

vii. Mention three (3) conditions under which the sacrifice ratio between the goods will be zero.

 

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