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The diagram refers to production possibility frontiers for a country that produces capital goods and consumer goods - Edexcel - A-Level Economics A - Question 1 - 2018 - Paper 1
Question 1
The diagram refers to production possibility frontiers for a country that produces capital goods and consumer goods. Use the data to support your answers where rele... show full transcript
Worked Solution & Example Answer:The diagram refers to production possibility frontiers for a country that produces capital goods and consumer goods - Edexcel - A-Level Economics A - Question 1 - 2018 - Paper 1
Step 1
Calculate the original and the new opportunity cost of producing 50 capital goods.
Answer
To find the original opportunity cost of producing 50 capital goods, we need to identify the point on the production possibility frontier (PPF) associated with this output. According to the diagram, at point U, the economy is producing 100 units of consumer goods along with 50 units of capital goods.
The original opportunity cost can be determined by the slope of the PPF between points W and U. The change in consumer good output (from point W to point U) gives us insight into how many consumer goods must be sacrificed for each capital good produced. If moving from point W to U requires sacrificing, say, 50 consumer goods, then the opportunity cost of producing 50 capital goods is 50 consumer goods.
To find the new opportunity cost, we look at the production possibility frontier position XZ and identify that the opportunity cost has changed due to this shift. If the new point U produces more consumer goods due to advancements in production or resource allocation, the new opportunity cost may also be identified by the adjusting slope of the frontier. The revised costs may inform us that, for example, for every 50 capital goods, the economy might sacrifice only 30 consumer goods.
Thus, the original opportunity cost is 50 consumer goods for 50 capital goods, and the new opportunity cost may vary based on the new slope identified, anticipated to be lower due to improved efficiency in allocating resources.
Step 2
Which one of the following was the most likely cause of the movement in the production possibility frontier from XY to XZ?
Answer
C) An increase in demand for consumer goods.
This choice reflects that an increased demand for consumer goods can shift the production possibility frontier outward, as more resources may be allocated to satisfy the heightened demand. This adjustment would allow the production of more consumer goods and potentially enable a reallocation that enhances the economy's capabilities.
Step 3
Explain one characteristic of the economy at position W.
Answer
At position W, the economy is characterized by inefficient resource allocation. This means the available resources are not being used to their full potential, resulting in underproduction. The economy is not producing at its capacity, indicating that more of either capital goods or consumer goods could be produced without sacrificing the production of the other, leading to opportunities for improvement in output.