Question 4: 5 marks

Consider a simple economy of Korea - producing two goods, Motor bike and milk. The details of

the economy and its production is as follows:

Motor Bike (1000 / year) - Milk (1000 gallons per year)

0 - 60

1 - 50

2 - 30

3 - 0

a) Make a graph of Korean economy's production possibility frontier.

b) Explain this logic, why this PPF curve is always downward sloping.

c) Suppose this economy is producing 2000 motor bikes and 30,000 gallons of milk. What is

the opportunity cost of producing additional 20,000 gallons of milk?

d) According to the (BGH) technology, farmers can now get double the amount of milk from

cows easily. In terms of PPF, this means Korean economy can now produce twice milk at

each level of bike output. With the current production of 2000 motor bikes, Mr. B claims

that this new technology can allow this economy to produce more milk and more bikes. Do

you agree with this statement or not?

e) Explain carefully, with the help of diagram and justify your answer.