production possibility frontier (PPF) : Assignment

Added on - 29 Nov 2019

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A1a.The production possibility frontier (PPF) is drawn with cars on X axis and bicycles on Y axis.b.Aproduction possibility frontier is defined as thelocus of combination of two goods that can beproduced in an economy with available resources and technology.ASSUMPTIONS:Resources like land, labour are fixed, in terms of their quantity and their productivitylevelTechnology to produce cars and bicycles is same and unchanged for the purpose of datain this table. For any point on theproduction possibility frontierthe technology used toproduce the two goods remains unchanged.As per data given Newland can produce 30000 cars and zero bicycles OR 5000 bicyclesand zero cars. It can also produce a combination of goods as given in the data.PROPERTIES: these relate to the shape of theproduction possibility frontier and the various points onthe graph.A typicalproduction possibility frontieris bow- shaped, which means it is concave to the origin.This shape is attributed to the concept of increasing opportunity costs. These costs refer to the
amounts of a good that have to be given up for an alternative good. To produce one more carwe need resources. As all resources are used up we will have to pull out resources from bicycleproduction. The amount of pulled out resources is the opportunity cost of 1 car. Increasingopportunity costs means that to make more and more cars we need to free up an increasingamount of resources from bicycles. This means we have to give up on more and more bicycles.Any point inside theproduction possibility frontiershows that resources are unused. This is aninefficient point as resources are idle/ UNUTILISED.Any point outside theproduction possibility frontieris unachievable, though desirable. Giventhe resources and technology available such a point is unattainable.Any point on the curve is EFFCICIENT, as all resources are used.c.We need 1000 more bicycles and 2000 more cars as shown by point A.(3000 to 4000 bicyclesand 18000 to 20000 cars). As per the data if Newland makes 4000 bicycles then it can make only10000 cars. It can’t make 20000 cars as required with the given resources and technology. A liesbeyond the PPC. The requirement of increasing both cars and bicycles is not possible as theeconomy is already on the PPC- it is efficient. Unless the resources and/or technology improveswe cant make more of both. This is possible if PPC shifts out by:1.An increase in resources.2.An efficiency improvement /productivity rise among resources.3.Trade with other economies can shift out PPC.
A 2:a.Revenue is defined as the product of price and quantity. As the table tells us when price equals$400 the quantity demanded is 30 millions. Thus revenue = 30million*400 = $12000000000 = 12billion.When price equal $350 the quantity demanded is 35 million. So revenue = 35million*350 =12250000000 = 12.25 billion. Clearly revenue has risen by 0.25 billion increased.b.As per theory, there is direct relation between effect of price changes on revenues and priceelasticity of demand. Revenues will rise when price rises if demand is inelastic, while inelasticdemand cause revenues to fall. In our case when price rose from $300 to $350 the revenuesrose by 0.25 billion. Thus, an increase in price is accompanied by rise in revenues, showing thatdemand is inelastic.We can show this with a decrease in price as well. If price were to fall to 250 then revenues =250 million*45 = 11250000000 = 11.25 billion. Now revenue falls from 12 billion to 11.25 billionwhen price falls from $300 to $250. Thus, a fall in price caused a decrease in revenuesconfirming in elastic demand.PART IIQd= 100-5PQs = 5P
c.Equilibrium is reached at the point where demand = supply.Qd=Qs100 – 5P = 5P100 =10PP= 100/10 = 10Put this P value in Qd or QsPutting in Qs: Qs= equilibrium Q= 5*10=50d.Consumer surplus is the area under the demand curve and the equilibrium price.To get a point of price axis we put Q= 0 in Qd to get Qd= 0 = 100 -5PP= 100/5 =20Consumer surplus = area of orange triangle = ½ *50*(20-10) = 250To get a point of price axis we put Q= 0 in Qs to get Q = 0Producer surplus = area of blue triangle = ½ *50*10 = 250Total surplus = 250+250 = 500
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