Question

Refer to the following production possibilities table for consumer goods (automobiles) and capital goods (forklifts).

1. Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
2. If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Which characteristic of the production possibilities curve reflects the law of increasing opportunity costs: its shape or its length?
3. If the economy characterized by this production possibilities table and curve is producing 3 automobiles and 20 forklifts, what could you conclude about its use of its available resources?
4. Is production at a point outside the production possibilities curve currently possible? Could a future advance in technology allow production beyond the current production possibilities curve? Could international trade allow a country to consume beyond its current production possibilities curve?

	Production Alternatives
Type of Production	A	B	C	D	E
Automobiles	0	2	4	6	8
Forklifts	30	27	21	12	0

Short answer

a. This graph assumes the fixed supply of available resources and technology and full employment of all the resources.

b. The opportunity cost for 1 more automobile is 4.5 units of the forklift.

The opportunity cost for 1 more forklift is 1/3 of one automobile.

The shape of the production possibilities curve reflects the law of increasing opportunity costs.

c. The available resources in the economy are not fully employed.

d. The production at a point outside the production possibilities curve is not currently possible.

A future advance in technology can help the economy to produce beyond the current production possibilities curve.

Only international trade can allow the economy to consume beyond its current production possibilities curve.

Step-by-step solution

Explanation for part 'a'

The data for the production possibility is shown below by the PPF graph.

Explanation for part 'b'

When the economy is at point C, it consumes 4 units of automobiles and 21 units of forklifts. To consume 2 more units of automobiles, it moves toward point D.

At point D, the economy gives up 9 units of forklifts. So, the opportunity cost of one more automobile is as follows.

$$\begin{gathered} Opportunity\cos tofonemoreautomobile=\frac{9}{2} \\ =4.5 \end{gathered}$$

Therefore, the opportunity cost for one more automobile is 0.45 units of forklifts.

To consume 6 more automobiles, the economy has to give up 2 units of forklifts at point C. So, the opportunity cost of one more forklift is as follows.

$Opportunity\cos tofonemoreforklift=\frac{2}{6}=\frac{1}{3}$

Therefore, the opportunity cost of one more forklift is 1/3 of 1 automobile.

The shape of the curve denotes the increasing opportunity costs as the curve is steeper. As it moves from the origin to the x-axis, you can see that for very little increase in the number of automobiles, the number of forklifts falls significantly, and thus, the curve is steeper.

Explanation for part 'c'

In the economy characterized by the given production possibilities table, it can produce 4 automobiles and 21 forklifts together, making full use of all the resources.

However, if the economy produces only 3 automobiles and 20 forklifts, it means that the economy is producing less than its full capacity. Therefore, we can say that the economy is not fully employing its available resources.

Explanation for part 'd'

The country cannot produce a combination outside the current production possibility curve because of the scarce resources. However, if the country advances its technology in the future, it will produce more goods, making efficient use of the available resources.

So, the country will be able to operate beyond the present production possibilities curve with the help of advances in technology. An economy can consume beyond the present PPF through international trade.

The country that is more efficient in manufacturing any one of the two goods better than our economy will export to our economy in exchange for few units of the other goods. This way, both the economies will consume beyond their production possibilities curve.

For example, if Japan can produce 10 units of automobiles and 20 units of forklifts, Japan will import some forklifts from our economy and export a few automobiles to our economy. So, both economies can consume beyond their present production possibilities.