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Problem: Consider a simple economy producing two goods: cars and milk. The following table gives several points on this economy's Production Possibility Frontier (PPF):
Cars (1000's/year) Milk (1000's of gallons/ year)
0 60
1 50
2 30
3 0
Required:
Question 1: Graph this economy's PPF and label the axes as you deem fit; the interpretation of opportunity cost does NOT change with the delineation of the axes.
Question 2: Why is the production possibility frontier downward sloping? Explain the underlying economic logic.
Question 3: Why is the production possibility frontier strictly concave in this case? Note that in some cases the PPF can be 'weakly concave', where a portion of the curve may be a linear segment. Strict concavity rules out such 'weakly concave' segments. Does a linear PPF meet the criterion of both weak concavity and weak convexity?
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