METU

Department of Economics
Econ 210: Principles of Economics
Section All
Fall 2022-2023

Review Problem Set

The Production Possibility Frontier

A graph that shows all the combinations of goods and services that can be
produced if all of society’s resources are used efficiently.

𝐴 → Attainable, Efficient
𝐵 → Attainable, Efficient
𝐷 → Attainable, Inefficient
𝐸 → Attainable, Efficient
𝐺 → Unattainable
(Inefficiency: operating below its potential)
Part A: Short Questions

Q1: Define the following terms:

a. Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two products that
may be produced with available resources and current technology
b. Opportunity cost
The highest valued alternative that must be given up engaging in that activity.
c. Absolute advantage
The ability of an individual, a firm or a country to produce more of a good or
service than competitors, using the same amount of resources.
d. Comparative advantage
The ability of an individual, a firm or a country to produce a good or service at a
lower opportunity cost than competitors.
Q2: Explain what is meant by the term "frontier" in a production possibilities
frontier. Do the same for "possibilities."?
Frontier implies that production has reached its maximum, that resources are
being used efficiently, technologically efficiently and fully used. The possibilities
refer to the numerous combinations of output that can be produced, though not
necessarily on the frontier. When combined it implies that resources can be
technologically efficient and produce various combinations of output.
Q3: Explain how a production possibilities frontier exhibits the concept of
scarcity.
Any movement along the PPF (or from that matter inside the PPF) indicates that
a choice or decision has been made. Given that a choice has been made to
produce a given combination of the two goods depicted over an alternative
bundle of goods, an opportunity cost has been experienced. The opportunity cost
can be measured simply by the differences in production of the two goods over
the next best alternative bundle. If there is an opportunity cost, then the PPF
reflects scarcity because scarcity forces us to make choices.
Q4: Explain why a production possibilities frontier is concave or bowed outward
from the origin.
The law of increasing costs causes the PPF to be shaped in this manner.
Resources are specialized. In order to continue to produce more of any one
good, more resources must be used in the goods production. This causes
producers to use less productive resources, as all workers do not have the
same productivity level for example. So, output increases at a decreasing rate
because resources that are less productive are being used.

Part B: Problems

Q1: According to information given below:

i. Draw the production possibility frontier (PPF) (put cheese on the x-axis)

ii. The production possibilities frontier is _____ to the origin. (concave /convex)

iii. Can this economy produce 200 units of cheese and 1500 liters of wine?

iv. Can this economy produce 200 units of cheese and 2200 liters of wine?

v. What is the opportunity cost of increasing cheese production from 200 units to

400 units (i.e., if the economy moves from combination B to combination C)?

What is the opportunity cost per unit of cheese?

vi. What is the opportunity cost of increasing cheese production from 400 units

to 600 units (i.e., if the economy moves from combination C to D)? What is the

opportunity cost per unit of cheese?

vii. Does the principle of “increasing opportunity cost” hold in this economy?
Solution:

i)

ii) Concave

iii) Yes, but it is inefficient, or some resources are unemployed

iv) No. It is unattainable.

v) The opportunity cost: 1800 − 1500 = 300 liters of wine

The per unit opportunity cost

vi) The opportunity cost: 1500 − 1100 = 400 liters of wine

The per unit opportunity cost

vii)

Based on the answers to parts v and vi, we can conclude that the principle of

increasing opportunity cost applies in this economy. The opportunity cost of

each additional unit of meat in terms of wheat increases as more units of meat

are produced.
Q2: How do the following events affect the PPF of a country, which produces

only two goods, 𝑋 and 𝑌?

i. A new law is passed which has decreased the retirement age from 65 to 55.

ii. An earthquake has destroyed most of the production facilities and has killed

many people.

iii. A technological advance has increased the efficiency of workers in the good

X industry.

iv. A large number of workers have immigrated into this country.

Solution:
Q3: Fill in the blanks according to the figure:

i. If the economy is producing 100 units of roses, maximum amount of gun

production is ___ units.

ii. The maximum quantity of roses that can be produced is ___ units.

iii. Assume that production takes place at point c. The opportunity cost

production of guns to 100 units is ___ units of roses.

iv. Assume that production takes place at point g. The opportunity cost of

increasing production of guns to 100 units is ___.

v. Assume that production takes place at point a. The opportunity cost of

increasing production of roses to 100 units is ___ units of guns.

vi. Assume that production takes place at point e. The opportunity cost of

increasing production of roses to 100 units is ___.

vii. The efficient point(s) is/are ___.

viii. The inefficient point(s) is/are ___.

ix. The unattainable point(s) is/are ___.

x. The attainable point(s) is/are ___.

Solution:

i. 100

ii. 150

iii. 40

iv. 0

v. 40

vi. 0

vii. a, b and c

viii. e and g

ix. d

x. a, b, c, e and g

Q4: The figure below shows the production possibilities frontier for

Tomorrowland. They produce two goods, wine and beer.

i. What is the opportunity cost of one liter of wine?

ii. What is the opportunity cost of one liter of beer?

iii. Suppose Tomorrowland is currently producing 60 liters of wine per period.

How much beer is it also producing, assuming that resources are fully utilized?

iv. If Tomorrowland chooses to produce 160 liters of wine, how much beer can it
produce to maximize production?

v. If Tomorrowland chooses to produce 30 liters of beer, how much wine can it

produce to maximize production?

Solution:

i)

ii)

iii)

Opportunity cost of producing 1 liters of wine is 3/4. So,

The maximum amount of beer Tomorrowland can produce is 120. So,

120 − 45 = 75

iv)

All resources are devoted to produce wine. So, the production of beer is zero.
v)

Opportunity cost of producing 1 liters of beer is 4/3. So,

The maximum amount of wine Tomorrowland can produce is 160. So,

160 − 40 = 120

Q5: The table shows labor productivities, i.e., outputs per worker. That is, these

numbers report the quantity of output per unit of labor that each country can

produce in the two industries, X and Y.

Determine which country has

a. Absolute advantage in good X.

Country A because A produces more of X compared to Country B.

b. Absolute advantage in good Y.

Country A because A produces more of Y compared to Country B.

c. Comparative advantage in good X.

For A, opportunity cost of producing X=4/8=1/2

For B, opportunity cost of producing X=2/6=1/3

B has lower opportunity cost of producing X, therefore B has comparative

advantage in good X

d. Comparative advantage in good Y

For A, opportunity cost of producing Y=8/4=2

For B, opportunity cost of producing Y=6/2=3

A has lower opportunity cost of producing Y, therefore A has comparative

advantage in good Y.

Q6: Answer the following questions for the given plot.

a) If this economy is producing 90 tons of steel, what is the maximum amount of

wheat that can be produced?

25 tons.

b) What is the maximum quantity of wheat that can be produced?

100 tons.

c) What is the opportunity cost of increasing the production of steel from 80 to

90 tons?

20 tons of wheat.

d) What is the opportunity cost of increasing the production of steel from 90 to

100 tons?

25 tons of wheat.

e) Which points are the efficient production combinations?

A, B, C and D.

f) Which points are the inefficient production combinations?

E and G.

g) Which points show the unattainable production combinations?

h) Which points show the attainable production combinations?

A, B, C, E and G.
Part C: Multiple Choice Questions

Q1: A production possibilities frontier that is concave to the origin indicates that

the opportunity cost .............. as more of a good is produced.

a. remains constant

b. decreases

c. increases

d. none of the above.

Q2: Which of the following will cause the production possibilities frontier to shift

outward?

a. An inefficiency that has been corrected

b. A decrease in the size of the capital stock

c. An increase in the size of the labor force

d. A decrease in the unemployment rate

Q3: The production possibilities frontier represents

a. Combinations of goods and services for which consumers are indifferent

b. The maximum combination of goods and services that can be produced with

fixed resources and technology.

c. The maximum amount of labor and capital available to society

d. The maximum rate of growth of capital and labor in a country

Q4: Which one of the following statements is true?

a. The production possibilities curve is positively sloped which shows that as

society wants to produce more of one good; it must produce less of another.

b. The production possibilities curve is negatively sloped because with a limited

set of resources, society can only produce more of one good by taking

resources out of producing another good.

c. A point outside the production possibilities curve is possible, since resources

are fully employed.

d. At a point inside the production possibilities curve, resources are efficiently

used

Q5: If the PPF is a downward sloping straight line, then

a. The opportunity cost is constant

b. Production is efficient

c. Technological changes have ceased

d. Resources are highly specialized, making it difficult to use for alternative uses

Q6: The negative slope of the production possibilities curve illustrates that:

a. some resources are always unemployed

b. when resources are fully employed, an economy can produce more of one

thing only by producing less of something else

c. opportunity costs are constant

d. businesses can sell more goods when their prices are low

Q7:

Which of the graphs indicate an increase in resources?

a. Graph A
b. Graph B

c. Graph C

d. Graph D

Q8: The slope of a production possibilities frontier indicates the ________.

a. Opportunity cost of producing one unit more of the good on the X-axis

b. The amount of resources needed to produce the combination of goods

c. Opportunity cost of producing one unit more of the good on the Y-axis

d. The amount of goods produced

Q9: The points outside the production possibilities frontier are:

a. efficient.

b. attainable.

c. inefficient.

d. unattainable.

Q10: When moving along a production possibilities curve, the opportunity cost

to society of getting more of one good:

a. is constant.

b. is measured in dollar terms.

c. is measured by the amount of the other good that must be given up.

d. usually decreases.