Answers to end-of-chapter questions

1. 
   Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
   

The curve is based on the assumptions of full employment, fixed resources, fixed technology, and two goods.

b. If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Explain how the production possibilities curve reflects the law of increasing opportunity costs.

One more automobile would cost 4.5 forklifts (2 automobiles = 9 forklifts).

One more forklift would cost 1/3 automobiles (6 forklifts = 2 automobiles.

The law of increasing opportunity costs could be reflected as follows: Producing the first two automobiles only costs three forklifts; the next two cost six forklifts; and so forth. Producing the last two automobiles would cost twelve forklifts; demonstrating that each additional automobile costs more than the previous one.

c. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 fork lifts, what could you conclude about its use of its available resources?

The economy’s resources are not fully employed.

d. What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production?

Producing outside the curve is not possible. To reach a level of production beyond an existing curve would require expansion of the curve by increasing the quantity or quality of resources, or by advancing technology.