Suppose the production possibility boundary (PPB) for a country that produces only two goods (x and y) is given by y = 100 – x ² . Therefore the slope of the PPB at any given level of good x production is -2x.

(a) How much y is produced if the economy produces no x? What is the maximum amount of .x that can be produced? Sketch the PPB with x on the horizontal axis, and y on the vertical axis.

(b) Explain why the (absolute value of the) slope of the PPB represents the opportunity cost of x. What might explain why the opportunity cost of x is increasing as more of it is produced?

(c) Suppose the economy is currently producing 5 units of x and 50 units of y. Illustrate this production point in your diagram. What is the opportunity cost of x given this production point? Explain.

(d) Now suppose that the economy is currently producing and consuming 8 units of x and 36 units of y. What is the opportunity cost of x? What would be the relative price of x (units of y per x)?

Answer rating: 100% (QA)

a We have production possibility frontier as y 100 x 2 if it produces no x then x 0 thus y 100 0 2 1... View the full answer