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Consider the production possibilities curve for a nation that can produce either consumption or...

Question:

Consider the production possibilities curve for a nation that can produce either consumption or investment goods. Describe and show the impact of each of the following using the PPF diagram.

a. Technological advancement in the production of investment goods that has no impact on production of consumption goods.

b. A major recession leads to an unusually high level of unemployment

c. A massive 10.2 earthquake causes California to fall into the Pacific Ocean.

d. Fundamental shift in cultural values leads to increased preference for investment goods.

Production Possibility Curve:

Production Possibility Curve is a curve that shows the combinations of two goods say consumption and investment given the resources and technology in an economy. PPC can be a shift when there is a change in technology, demand, and supply of these goods.

Answer and Explanation: 1

a) Technological advancement in the production of investment goods that has no impact on the production of the consumption good will rotate the PPC towards investment good which shows more investment goods can be produced without a reduction in consumption goods. The investment goods will increase from I to I1 as shown in the diagram.

b) A recession leads to an unusually high level of unemployment means the demand for both the goods has been reduced which will shift the PPC inward or leftward. It shows less production of both the goods than earlier. The output will fall from C to C1 and I to I1 respectively as shown in figure 2.

c) A massive earthquake will result in a fall in the resources in an economy that will shift the PPC inward. The production of both the goods will reduce from Ca to Cb and Ia to Ib respectively. It is shown in figure 3.

d) When there is an increased preference for investment goods then it means people demand more of investment good which will increase the production of these goods. In this case, PPC will rotate towards investment good and output will increase from Ia to Ib shown in figure 4.


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Using the Production Possibility Curve to Illustrate Economic Conditions

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Chapter 3 / Lesson 8
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The production possibility curve demonstrates the potential profit from a given economic condition. See how this illustrates different economic conditions through evaluating scarcity, production factors, efficiency, and opportunity costs.


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