Question

Consider two alternatives for Stromboli in \(2018 .\) In case (a), its inhabitants eat 60 million pizzas and build 6,000 pizza ovens. In case (b), the population eats 15 million pizzas but builds 18,000 ovens. Which case will lead to a more generous production possibilities frontier for Stromboli in \(2018 ?\)

Short answer

Answer: Case (a) will lead to a more generous production possibilities frontier for Stromboli in 2018.

Step-by-step solution

Understand the concept of a Production Possibilities Frontier (PPF)

A Production Possibilities Frontier represents the combination of goods and services that can be produced by an economy using its resources optimally. In this case, we are comparing the production of two goods: pizzas and pizza ovens. The PPF indicates the trade-off between the two goods – in this case, we want to determine which case allows for a more generous combination of pizzas and pizza ovens.

Calculate the production possibilities for each case

To compare the two cases, we need to determine the possibilities of production of pizzas and pizza ovens in each case. Using the given information, we can compare the production possibilities as follows: Case (a): - 60 million pizzas - 6,000 pizza ovens Case (b): - 15 million pizzas - 18,000 pizza ovens

Compare the production possibilities and make a decision

Now that we have calculated the production possibilities in each case, it's time to make a comparison. Case (a) allows for the production of more pizzas (60 million vs 15 million) but fewer pizza ovens (6,000 vs 18,000) compared to Case (b). By merely looking at the numbers, it might seem that Case (b) would result in a more generous production possibility frontier, as the difference in the number of pizza ovens (12,000) is much more significant than the difference in the number of pizzas (45 million). However, we need to consider the ratios to make a better comparison.

Calculate the ratios of pizzas to pizza ovens for each case

To effectively compare the two cases, we can calculate the ratios of pizzas to pizza ovens in each case: Case (a): 60,000,000 pizzas / 6,000 pizza ovens = 10,000 pizzas per pizza oven Case (b): 15,000,000 pizzas / 18,000 pizza ovens = 833.33 pizzas per pizza oven

Determine which case will lead to a more generous PPF

Based on the ratios calculated in Step 4, we can see that Case (a) allows for the production of more pizzas per pizza oven compared to Case (b). This means that Case (a) will result in a more generous combination of pizzas and pizza ovens in the production possibilities frontier, as it allows for a more efficient use of resources and higher production potential. In conclusion, Case (a) will lead to a more generous production possibilities frontier for Stromboli in 2018.

Key concepts

Opportunity Cost

When Stromboli inhabitants decide between eating pizzas and building ovens, they face a common economic dilemma: the concept of opportunity cost. Opportunity cost represents the value of the best alternative forgone when a choice is made. It's the cost of what you are giving up to get something else. In our exercise, if Stromboli chooses to build more pizza ovens (Case b), the opportunity cost would be the pizzas not consumed.

Calculating opportunity cost is pivotal in making informed economic decisions. For Stromboli, by choosing Case (a) over Case (b), the opportunity cost is measured in the number of pizza ovens foregone to produce more pizzas. In economic terms, choosing the alternative that has a lower opportunity cost can often lead towards a more efficient allocation of resources, assuming pizzas and pizza ovens have the same value to the inhabitants.

Economic Efficiency

In seeking to understand which case will lead to a more generous PPF for Stromboli in 2018, economic efficiency is a crucial concept to consider. This term refers to the optimal use of scarce resources to maximize the production of goods and services. Efficient production occurs when an economy is operating on its production possibilities frontier, meaning that it cannot produce more of one good without producing less of another due to limited resources.

In evaluating Case (a) and Case (b), we take into account how the resources are utilized to produce pizzas and ovens. Case (a)'s ratio suggests a more efficient allocation since for each pizza oven built, more pizzas could be produced. This indicates reaching closer to the frontier of what Stromboli can possibly achieve, maximizing their resource use and indicating a more economic efficiency.

Resource Allocation

Resource allocation involves deciding the best way to distribute the limited resources of Stromboli to produce different goods—in this case, pizzas and pizza ovens. It's an essential task, because how resources are allocated determines the types of goods produced, the quantity, and the quality. The challenge of resource allocation is making the most of what you have to meet the needs and wants of the population.

In Stromboli's scenario, proper resource allocation would require looking at the needs for immediate consumption (pizzas) versus future production capacity (pizza ovens). Case (a) suggests a focus on current consumption needs, while Case (b) leans towards building capital for future production. However, the PPF indicates that Case (a) may offer a better immediate use of resources. A more generous PPF—as suggested by Case (a)—may lead to improved welfare by ensuring that current needs are met without excessively sacrificing future production capabilities.