Homework Assignment 1 : Production Possibilities (Answer Key)A certain economy only produces two goods, calculators (C) and tea (T). Tomanufacture these goods, it has three kinds of resources: (1) a fixed quantity ofcapital, useful only in producing calculators; (2) a fixed quantity of land, useful only inproducing tea; and (3) a fixed quantity of labor of 100 men (M) capable of working ineither occupation. The table below indicates the amounts of calculators and tea thatcan be produced when varying amounts of labor work with the specialized resources,calculators and tea.Number of menDMDailyproductionof calculatorsDCNumber ofmenDMDaily productionof tea0 0 0 010 10 40 40 10 520 10 105 65 20 1230 10 200 95 30 2040 10 300 100 40 2850 10 390 90 50 3660 10 450 60 60 4370 10 500 50 70 4980 10 550 50 80 5490 10 580 30 90 58100 10 600 20 100 601. Draw this economy’s production-possibility curve. (Be careful to label axes. Use ofgraph paper will enable your graph to be more accurate.)PPF01002003004005006000 5 12 20 28 36 43 49 54 58 60Tea (X)Calculators (Y)1. According to the table above, diminishing returns first appear in the production ofcalculators when the total number of men employed rises to :Between 40 and 50 men.Explain what causes this diminishing returns phenomenon briefly.As additional units of the variable input, labor, are combined with the fixed input,capital (in respect to calculator production) eventually ever-decreasing increases in output(of calculators) will result. (The fixed input is crowed out by additions of the variableinput.)3. What is the opportunity cost of producing 200 calculators instead of 40?9 units of tea.Explain the concept of opportunity cost briefly.In this example, if more calculators are produced the units of tea productionforegone, given the available labor, resources, represent the opportunity costs.4. Assume that the production possibility curve above exists in 1985. Assume furtherthat the following (separate) events took place between 1985 and 2000. Otherthings being equal, explain carefully how the production possibility curve would bealtered. a) The use of robotics technology is introduced into computer industry. b) A strain of virus destroys a large percentage of tea plants worldwide. c) Improved harvesting methods are employed in the tea industry. d) Population growth continues at current positive rates over this period. a) b)2Calculators é Calculators ç Tea Tea c) d) Calculators Calculators ì è Tea
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