Classify the following Microsoft resources as land, labor, capital, or
entrepreneurial ability: code writers for software, Bill Gates, production facility for
Windows CD-ROMs, "campus" on which Microsoft buildings sit, grounds crews at
Microsoft campus, Microsoft corporate jet.
ANSWER:
Land - campus where Microsoft buildings sit. Labor - code writers, grounds crews.
Capital - production facility, corporate jet. Entrepreneurial ability - Bill Gates.
2-5
Distinguish between full employment and full production as they relate
to production possibilities analysis. Distinguish between productive efficiency and
allocative efficiency. Give an illustration of achieving productive efficiency, but not
allocative efficiency.
ANSWER:
Full employment occurs when all available resources are utilized; full production means that all employed resources are used to provide the maximum possible satisfaction of
material wants. Both are required for an economy to be producing on the production
possibilities curve. An economy that is employing all available resources but which
allocates labor to unproductive tasks will operate inside the curve. Likewise, putting
resources to their most productive uses but failing to employ all resources will result in
an economy producing inside the curve.
Allocative efficiency means that resources are being used to produce the goods and
services most wanted by society. The economy is then located at the optimal point on its
production possibilities curve where marginal benefit equals marginal cost for each good.
Productive efficiency means the least costly production techniques are being used to
produce wanted goods and services. Examples: manual typewriters produced using the
least-cost techniques but for which there is no demand; cigarettes produced using leastcost
techniques but for which there are "bads" created that are not accounted for by the
market.
2-6
Here is a production possibilities table for war goods and civilian goods:
a. Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
b. If the economy is at point C, what is the cost of one more automobile? One more
missile? Explain how this curve reflects increasing opportunity costs.
c. What must the economy do to operate at some point on the production possibilities
curve?
ANSWER:
(a) See curve EDCBA. The assumptions are full employment and productive efficiency,
fixed supplies of resources, and fixed technology.
(b) 4.5 rockets; .33 automobiles, as determined from the table. Increasing opportunity
costs are reflected in the concave-from-the-origin shape of the curve. This means the
economy must give up larger and larger amounts of rockets to get constant added
amounts of automobiles--and vice versa.
(c) It must obtain full employment and productive efficiency.
2-9
Specify and explain the shapes of the marginal-benefit and marginal-cost
curves and use these curves to determine the optimal allocation of resources to a
particular product. If current output is such that marginal cost exceeds marginal benefit,
should more or less resources be allocated to this product? Explain.
ANSWER:
The marginal benefit curve is downward sloping, MB falls as more of a product is
consumed because additional units of a good yield less satisfaction than previous units.
The marginal cost curve is upward sloping, MC increases as more of a product is
produced since additional units require the use of increasingly unsuitable resource. The
optimal amount of a particular product occurs where MB equals MC. If MC exceeds
MB, fewer resources should be allocated to this use. The resources are more valuable in
some alternative use (as reflected in the higher MC) than in this use (as reflected in the
lower MB).
2-10
Label point G inside the production possibilities curve you have drawn
for question 6. What does it indicate? Label point H outside the curve. What does this
point indicate? What must occur before the economy can attain the level of production
indicated by point H?
ANSWER:
G indicated unemployment, productive inefficiency, or both. H is at present unattainable.
Economic growth--through more inputs, better inputs, improved technology--must be
achieved to attain H.
2-11
Referring again to question 6, suppose improvement occurs in the
technology of producing missiles but not in the production of automobiles. Draw
the new production possibilities curve. Now assume that a technological advance
occurs in producing automobiles but not in producing missiles. Draw the new
production possibilities curve. Now draw a production possibilities curve that
reflects technological improvement in the production of both products. See the
graph for question 2-6. PPC1 shows improved missile technology. PPC2 shows improved auto technology. PPC3 shows improved technology in producing both
products.
