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Gotham's economy produces only two goods, food and machinery

Economics

Gotham's economy produces only two goods, food and machinery. In 2019 Gotham was able to produce 200 units of machines using all available resources. If all available resources are used for food production, in the same year the Gotham economy can produce 400 units. In 2019 the Gotham economy was able to operate efficiently.

a. Draw the production possibilities frontier (curve) of the Gotham economy in 2019, with increased opportunity costs per machine unit (the machine is represented on the X-axis). Explain the various economic concepts represented by the curve.

b. Using the graph on (a) determine 3 points (name them as A, B and C) that can describe the Gotham economy in 2019.

c. Five years ago Gotham’s economy was not able to use all available resources, what conditions happened in Gotham? Using the same graph as points (a) and (b), create a point (name it D) that shows the condition. Explain.

d. How do you explain the changes that have occurred in the Gotham economy during the five year period?

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A. Following image shows the production possibility frontier (PPF) for this economy, with increased opportunity costs. The curve is downward sloping, which means that when the resources are constant, more food can only be produced when production of machines is reduced. The curve is concave, because opportunity costs are increasing. This means that as we will increase production of units of machines one by one, we will have to forego more and more units of food production for every successive unit of machines produced. ?

B. Points A, B, and C show 3 points on which the economy of Gotham might operate in 2019, given the fact that resources are fully utilised. Point A shows all resources are used in production of machines (as shown on x-axis) such that 200 machines are produced with no food. Point B shows all resources are used in production of food (as shown on y-axis) such that 400 units of food are produced with no machines. Point C shows a combination wherein both machines and food are produced in the ratio 100:325.

C. Point D shows a state where the Gotham economy is not able to utilise all its resources completely. This may be due to various reasons. For example, the current level of technology is insufficient or inefficient in the sense that it is not letting the Economy tap its complete potential. Another example could be due to emergency events like war or natural calamity, resources had to be diverted towards unproductive uses.

D. The biggest possible change that might have occurred in the Economy in the past 5 years is the development of suitable technology such that the productivity of people has risen, which has allowed utilisation of all resources completely.

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