Question
An economy produces two goods X and Y .lt uses two means of production, labour and capital. A units of labour can produce either 1unit
An economy produces two goods X and Y .lt uses two means of production, labour and capital. A units of labour can produce either 1unit of X or 4units of Y ( or any linear combination of the two).A unit of capital can produce either 4units of X or 1unit of Y ( or linear combination of the two).there are 100units of each means of production.
(i)Draw the production possibility frontier of the economy when the two goods can only be produced by the mixture of both factors.
(ii)What will be the opportunity cost of X if the economy produces 50units of X?
(iii)Given that the production technology is linear, will the opportunity cost of X remain unchanged when we produce 90units of X ?
(iv)Briefly explain the difference between the PPC with a constant opportunity cost and the PPC with an increasing opportunity cost as more output of one good is produced. Use a well labeled diagram to explain your answer.
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