Econ 1
Problem Set #1 Solutions
Fall 2010
1.
Suppose that the following the points (AGR,MAN) = (10,30) and (AGR,MAN) =
(20,10) lie on society’s production possibilities frontier for manufactured goods
and agricultural goods.
a.
Suppose that the PPF satisfies the law of increasing opportunity costs.
If
society produces 15 units of AGR, what is the most that you can say about
the production of MAN?
Using a graph, give your reasoning.
AGR
MAN
(10,30)
(20,10)
(15,??)
A total of 20 units of MAN have to be given up to go from 10 to 20 units
of AGR. Further, because opportunity costs are increasing, we know that
when we move from producing 10 to 15 units of AGR, we are going to
have to give up fewer units of MAN than when we move from 15 to 20
units of AGR.
Thus, we know that if society is producing 15 units of
AGR, it is producing at least 20 units of MAN. That is 20 < MAN < 30.
b.
Now, suppose that the PPF satisfies the law of
decreasing
opportunity
costs (perhaps because of learning-by-doing). If society produces 15 units
of AGR, what is the most that you can say about the production of MAN?
Using a graph, give your reasoning.
AGR
MAN
(10,30)
(20,10)
(15,??)
If opportunity costs are decreasing, then we know that we know that when
we move from producing 10 to 15 units of AGR, we are going to have to
give up more units of MAN than when we move from 15 to 20 units of
AGR. Thus, we know that if society is producing 15 units of AGR, it is
producing no more 20 units of MAN. That is 10 < MAN < 20.