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Chapter 02 Homework- Efficiency in the production possibilities model

Chapter 02 Homework- EC110-Principles of Macroeconomics

Question

Suppose the fictional country of Katmai produces only two goods: millet and microprocessors. The following graph plots Katmai’s current production possibilities frontier, and includes six different output combinations given by black points (plus symbols) labeled A to F.

Chapter 02 Homework- Efficiency in the production possibilities model

Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, or unattainable. Check all that apply.

Answer

Chapter 02 Homework- Efficiency in the production possibilities model

Explanation:

Every output combination on the production possibilities frontier shows an efficient output combination for Katmai. The points on the production possibilities frontier represent all combinations of output produced using all of the nation’s available resources and its current technology, such that the nation cannot produce more of one good without producing less of the other.

Points located inside the production possibilities frontier, such as C and D, represent inefficient output combinations. At these points, it is possible to increase the production of both goods because some resources are unemployed. For example, point C is inefficient because it is possible for Katmai to produce at point B instead, where the economy is producing both more millet and more microprocessors.

Points located on the production possibilities frontier, such as A and B, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if Katmai is currently producing at point B and decides that it wants to produce more millet, it must produce fewer microprocessors.

Points located outside the production possibilities frontier, such as E and F, represent output combinations that are unattainable, given current resources and technology. Recall that each point on the production possibilities frontier shows the maximum quantity of millet Katmai can produce if it also wants to produce the given quantity of microprocessors. For example, compare point B (36 million microprocessors and 46 million bushels of millet) with point F (36 million microprocessors and 80 million bushels of millet). Because point B is on Katmai’s production possibilities frontier, you can see that if Katmai is producing 36 million microprocessors, it can produce at most 46 million bushels of millet. Therefore, point F must be unattainable, given current resources and technology.

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