PROBLEM SET- TUTORIALS

PRINCIPLES OF MICROECONOMICS- ECO100

SECTION 9
FALL 2015
MD. SYFUL HOQUE
ADJUNCT FACULTY

DEPARTMENT OF ECONOMICS
EAST WEST UNIVERSITY-BANGLADESH

Principle of Economics

1. Questions on the production possibility frontier:

a) What does it mean for the PPF to be concave and why would this happen?
b) What does it mean to be inside the PPF and how can this happen?
c) Suppose an economy produces only guns and butter. How does technical progress
in the production of guns affect the PPF? How does technical progress in the
production of butter affect the PPF?
d) How does an increase in labour supply affect the PPF?
e) How does a decrease in the rate of unemployment affect the PPF?

Outline Answers
1. a.
Guns

Butter
Concave means this shape (think of looking up at the curve from the origin), rather than
bending towards the origin (draw an example of a convex or straight line PPF to
contrast).

It means that the higher the output of one good, the greater the opportunity cost of
obtaining another unit of the good in terms of the other good.
[Compare the slopes at different points on the PPF, remembering that the slope measures
the opportunity cost of butter]
That could be because some factors of production tend to be specialised. The more we
shift factors into one industry the lower is their productivity in that industry relative to the
other industry.
b. Inside the PPF means that (1) some productive resources are not being used, say
because of unemployment, or (2) because productive resources are being allocated
inefficiently. (those that are most productive in industry A are allocated to industry B and
vice versa).

c. Technical progress in guns

Guns

Butter
Technical progress in butter
Guns

Butter

d. PPF shifts outwards everywhere

Guns

Butter

e.
A fall in unemployment shifts the economy towards the PPF it does not shift the PPF
itself.

Guns

Butter

2. Consider an economy which produces only beer and pizza. The resources of the
economy consist of 100 workers and a brewery. Each worker can produce 10 pizzas
per day. In the beer industry, each worker can produce 5 pints of beer per day.
(a) Draw the production possibility frontier. Explain the difference in the shape of
the PPF as compared to the ones drawn in the lecture.
(b) How many workers are there in each industry when the economy is producing
400 pizzas?
(c) What is the opportunity cost of a pizza when the economy is producing (i) 400
pizzas, (ii) 600 pizzas?
Now suppose that the maximum capacity of the brewery is reduced to 250 pints per
day. Any extra beer has to be produced by home brewing in which a worker can only
produce 2 pints per day.
(d) Draw the new production possibility frontier.
(e) What is the opportunity cost of a pizza when the economy is producing (i) 400
pizzas, (ii) 600 pizzas?

2. a.

Pizza
per day
1000

500

Beers per day

Straight line PPF; each additional worker to an industry produces the same amount as all
the previous workers.
b. 400 pizzas requires 400/10 = 40 workers in the pizza industry. The other 60 are in the
beer industry (if we are on the PPF).

c. Whatever the number of pizzas produced, the economy needs to sacrifice pint of
beer to produce one more pizza. So the opportunity cost of a pizza is pint of beer. [note
that the slope of the PPF is 2, which is the opportunity cost of a beer].

Pizza
per day
1000

500

250

350

Beers per day

e.
When the economy is producing 400 pizzas, the economy needs to sacrifice 2 pints of
beer to produce 10 more pizzas (by shifting one worker from home production of beer to
pizza production), so the opportunity cost of a pizza is 1/5 of a pint.
When the economy is producing 600 pizzas, the opportunity cost of a pizza is pint of
beer. [identify these points on the PPF].