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Chapter 02 Homework- EC110-Principles of Macroeconomics

1. Economic models

Consider the following graph that plots the production possibilities frontier model for a hypothetical economy that produces only two goods: rye and microprocessors.

Chapter 02 Homework- EC110-Principles of Macroeconomics

Which of the following is true regarding this economic model?

Incorrecta. This PPF is not an economic model.

Incorrectb. In order to construct such a model, an economist would need real life data regarding countries that produce only two goods.

Incorrectc. The fact that there are only two goods produced in this theoretical economy, when, in reality, economies produce many more types of goods, means this model is generally useless.

Correctd. The fact that there are only two goods produced in this theoretical economy is a simplifying assumption that still allows economists to demonstrate key economic concepts.

Explanation

Scientists, of all types, make assumptions in their models to simplify the complex world they are trying to describe. Making these simplifying assumptions allows scientists to focus on only the most important and most generalizable components of the topic of study.

Economists are no different. Economists make simplifying assumptions in all economic models in order to focus on the most important economic variables in a given situation. In this case, although much of the practical application of the production possibilities frontier (PPF) model is lost when only two goods are allowed, many key insights can more easily be demonstrated because of the simplicity of the model. This simple PPF model can still be used to model important economic concepts, such as opportunity cost, efficiency, feasibility, and technological change.

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