Posted: January 25th, 2021

Suppose that a simple society has an economy with only one resource,

Suppose that a simple society has an economy with only one resource, labor. Labor can be used to produce only two commodities—X, a necessity good (food), and Y, a luxury good (music and merriment). Suppose that the labor force consists of 100 workers. One laborer can produce either 5 units of necessity per month (by hunting and gathering) or 10 units of luxury per month (by writing songs, playing the guitar, dancing, etc.).

 

  • On a graph, draw the economy’s production possibility frontier (ppf). Where does the ppf intersect the Y-axis? Where does it intersect the X-axis? What meaning do those points have?

  • Suppose the economy produced at a point inside the ppf. Give at least two reasons why this could occur. What could be done to move the economy to a point on the ppf?

  • Suppose you succeeded in lifting your economy to a point on its ppf. What point would you choose? How might your small society decide the point at which it wanted to be?

  • Once you have chosen a point on the ppf, you still need to decide how your society’s product will be divided. If you were a dictator, how would you decide? What would happen if you left product distribution to the free market?

 

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