An economy produces textiles (T) and electronics (E). Its current production‑possibility frontier (PPF) is linear and given by

$$2T + E = 200,$$

where $T$ and $E$ are measured in units.

A technological improvement in the textile sector reduces the labour required per unit of textile by 20 %.

(a) Write the equation of the new PPF.

(b) What is the maximum possible output of textiles if all resources are devoted to textiles under the new PPF? State the increase in the maximum textile output compared with the original PPF.

(c) After the improvement, what is the opportunity cost of producing one additional unit of electronics in terms of textiles?

Question

An economy produces textiles (T) and electronics (E). Its current production‑possibility frontier (PPF) is linear and given by

$$2T + E = 200,$$

where $T$ and $E$ are measured in units.

A technological improvement in the textile sector reduces the labour required per unit of textile by 20 %.

(a) Write the equation of the new PPF.

(b) What is the maximum possible output of textiles if all resources are devoted to textiles under the new PPF? State the increase in the maximum textile output compared with the original PPF.

(c) After the improvement, what is the opportunity cost of producing one additional unit of electronics in terms of textiles?

Accepted Answer

a) 1.6T + E = 200; b) T_max = 125 units (increase of 25 units); c) opportunity cost of 1 E = 0.625 T

Neco Model Questions Vol1 2019 Economics Question 25

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