In an economy where a unit of labour can produce either 1 unit of x or 4 units of y (or any linear combination of the two) and a unit of capital can produce either 4 units of x or 1 unit of y (or any linear combination of the two). There are 100 units of each means of production. Suppose now that the discovery of new production technologies allows the production of both x and y by using only one of the two means of production (without a change in their respective productivity).
1) what will be the production possibility curve?
2) What will be the opportunity cost of producing 50 units of x?
How much y can the economy produce if it only makes y. The 100 units of labor can make 400 y and the 100 units of capital can make 100 y. A total of 500. Lable 500 on the y-axis of your this PPC. Start from here. If the economy gives up 1 unit of capital (1 y) it gets 4 units of x. So, your PPC gets a downward line with a slope of -1/4. After 100 units of capital, the opportunity cost changes, you the economy has to give up labor to get x; it gives up 4 units of y to get 1 x. So, your PPC gets a downward line with a slope of -4. In the end, your PPC crosses the x and y axis at 500 each.
Use the graph to answer #2.
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