Assignment:
Analyzing the PPF Model?
1. Consider the following combinations of Petroleum and Coffee for the fictional, two-good economy of Kolombia. Draw Kolombia's corresponding PPF?. Include labels for points A through E.
2. Circle the right words to complete the sentence.
a. Suppose the economy of Kolombia was producing 3 gallons of Petroleum and 11 bags of Coffee. ?This level of production is (attainable, unattainable) and (efficient, inefficient).
b. Suppose the economy of Kolombia was producing 7 gallons of Petroleum and 10 bags of Coffee. ?This level of production is (attainable, unattainable) and (efficient, inefficient).
Remember: The fact that some production levels are infeasible illustrates the idea of scarcity.
c. "The cost of Petroleum increases as Petroleum production increases" is a (positive, normative) statement, because it describes the economy, rather than making a prescription for how it should be.
d. "Kolombia should invest more in coffee because the poor deserve more jobs." is a (positive, normative) statement, because it prescribes how the economy should operate, rather than merely describing how the economy does operate.
3. Consider the opportunity cost of increasing the production of coffee by one bag.
a. What's the opportunity cost of producing one more bag within the range of B to C? Show your work.
b. What's the opportunity cost of producing one more bag within the range of C to D? Show your work.
4. The PPF is bowed outward. The underlying reason for this is the principle of increasing costs.
What is the principle of increasing costs and what is the reasoning behind it? Explain.
5. Suppose Kolombia experiences economic growth. Add a second curve to the PPF graph illustrating what happens when economic growth occurs. Include arrows to help differentiate the two curves.
6. What are the two causes of economic growth within the PPF model?