1) Assume that with employment and no changes in resources or technology, and ec
ID: 1247705 • Letter: 1
Question
1) Assume that with employment and no changes in resources or technology, and economy can produce the following combination of capital goods (those, such as machinery, that are used to produce other goods) and consumer goods (those, such as food that directly satisfied a consumer).Capital goods (thousands of units) Consumer goods (thousands of units)
100 0
90 25
70 50
40 75
0 100
a) Plot the above combinations and connect the points.
b) What would be the effect of operating at point a or b?
c) At which point on this curve should this economy produce? Why?
d) Plot a point labeled U to indicate that the economy is expiring some unemployment. Plot another point labeled U1 to indicate more serious unemployment than at point U.
e) Show graphically the effect on the production possibility curve of economic growth arising from new technology that influences the production of both capital goods and consumer goods.
f) Illustrate by a dashed line the effect of technological advances that improve the production of capital goods, but not consumer goods.
g) The opportunity cost of increasing production consumer goods from 25 thousands units to 75 thousands units ___________; the opportunity cost of increasing the production of consumer goods from 75 thousands units to 100 thousands units is ________; the opportunity cost of increasing the production of capital goods from 0-40 thousands units is ________; and the opportunity cost of increasing the production of capital goods from 40 thousands to units to 100 thousand is ___________.
Explanation / Answer
get the idea. Economic growth means the economy’s potential output is rising. Because the long-run aggregate supply curve is a vertical line at the economy’s potential, we can depict the process of economic growth as one in which the long-run aggregate supply curve shifts to the right. Figure 8.5. Economic Growth and the Long-Run Aggregate Supply Curve Because economic growth is the process through which the economy’s potential output is increased, we can depict it as a series of rightward shifts in the long-run aggregate supply curve. Notice that with exponential growth, each successive shift in LRAS is larger and larger. Figure 8.5, “Economic Growth and the Long-Run Aggregate Supply Curve” illustrates the process of economic growth. If the economy begins at potential output of Y1, growth increases this potential. The figure shows a succession of increases in potential to Y2, then Y3, and Y4. If the economy is growing at a particular percentage rate, and if the levels shown represent successive years, then the size of the increases will become larger and larger, as indicated in the figure. Because economic growth can be considered as a process in which the long-run aggregate supply curve shifts to the right, and because output tends to remain close to this curve, it is important to gain a deeper understanding of what determines long-run aggregate supply (LRAS). We shall examine the derivation of LRAS and then see what factors shift the curve. We shall begin our work by defining an aggregate production function. The Aggregate Production Function An aggregate production function relates the total output of an economy to the total amount of labor employed in the economy, all other determinants of production (that is, capital, natural resources, and technology) being unchanged. An economy operating on its aggregate production function is producing its potential level of output. Figure 8.6, “The Aggregate Production Function” shows an aggregate production function (PF). It shows output levels for a range of employment between 120 million and 140 million workers. When the level of employment is 120 million, the economy produces a real GDP of $11,500 billion (point A). A level of employment of 130 million produces a real GDP of $12,000 billion (point B), and when 140 million workers are employed, a real GDP of $12,300 billion is produced (point C). In drawing the aggregate production function, the amount of labor varies, but everything else that could affect output, specifically the quantities of other factors of production and technology, is fixed. The shape of the aggregate production function shows that as employment increases, output increases, but at a decreasing rate. Increasing employment from 120 million to 130 million, for example, increases output by $500 billion to $12,000 billion at point B. The next 10 million workers increase production by $300 billion to $12,300 billion at point C. This example illustrates diminishing marginal returns. Diminishing marginal returns occur when additional units of a variable factor add less and less to total output, given constant quantities of other factors. Figure 8.6. The Aggregate Production Function
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