Question

written questions

1. suppose an economy produces only steel and wheat. using three different graphs, show how the original production possibilities curve will change if each of the following events occurs.

a) a drought hits the wheat growing area
b) a large number of steel workers were laid off
c) a technological improvement occurs in the steel industry

Explanation:

a) A drought reduces the economy's ability to produce wheat, so the production possibilities curve (PPC) will shift inward only along the wheat axis; the maximum steel production remains unchanged, as steel production is unaffected.
b) Laying off steel workers reduces the economy's labor available for steel production, so the PPC will shift inward only along the steel axis; the maximum wheat production stays the same, as wheat labor is not impacted.
c) A technological improvement in steel production increases the economy's maximum steel output, so the PPC will shift outward only along the steel axis; the maximum wheat production remains unchanged, as wheat production is unaffected.

Answer:

a) The PPC shifts inward on the wheat axis (maximum wheat output decreases, steel output stays the same).
b) The PPC shifts inward on the steel axis (maximum steel output decreases, wheat output stays the same).
c) The PPC shifts outward on the steel axis (maximum steel output increases, wheat output stays the same).