Questions on PPC:

1. Given below is a production possibility curve for growing cereals and pulses. Answer the
questions related to this curve.

1. What is the nature of the slope and shape of the PPC. Give reason in a sentence each.
2. What is the opportunity cost (marginal rate of transformation) = {amount of goods
sacrificed/ amount of goods obtained} of moving from point E to F and F to G. Draw a
table to show the MRT.
3. What is the reason for increasing opportunity cost?
4. Consider 2 economies, A & B. B allocates more of its resources to Investment,
especially in R&D. A allocates more resources to consumer goods. Where would you
see greater outward shift in PPC over time and why?
Ans:
2. The synthetic production of Bovine Growth Hormone (BGH) allows dairy farmers to get twice as
much milk from each cow. In terms of this production possibility frontier, this means that this economy
can now produce twice as much milk at each level of car output. With the economy currently producing
2000 cars, Jerry claims that the development of BGH allows the economy to produce more milk and
more cars.

Do you agree? Explain carefully, using an appropriate diagram to illustrate your answer.

3. Through entrepreneurial discovery and innovation, new products and methods of production are
continuously replacing old ones. Harvard economist, Joseph Schumpeter called this creative
destruction. Automobile caused demise of horse and carriage, compact discs caused demise of vinyl
records. It destroys some businesses and industries but creates new and better ones in time. What
possible effect can creative destruction have on PPC.
Ans:

4. In the recent trade war between China & USA, President Trump imposed tariffs on imports of
aluminium and steel from China in March. More recently, he announced a 25% tariff $50 billion to
$60 bn in Chinese exports to the US including aerospace, ICT and machinery. China in turn, imposed
duties on a wide range of US goods including scrap aluminium, sparkling wine and apples. Trump
further promised tariffs on 1300 more Chinese products. Hours later China came out with tariffs on
Boeing planes.
Trump insists that is not a trade war but a response to Chinese intellectual property theft of US
technology. China has the reputation of making knockoffs of designer brand while borrowing
technological breakthroughs.
Farmers in the US are keeping a close watch on the escalating trade war, fearing that it will pose a
threat to the rural economy.
a. Considering that China has a trade surplus with the US currently, which country is likely to
see a greater shrinkage in the PPC.
b. Give an example of any government policy, which according to you has a positive effect onPPC
Ans: