Q1. Draw a production possibilities ... [FREE SOLUTION]

Chapter 5: Q1. (page 114)

Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve?

Short Answer

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The production possibility curve is shared below:

If an economy is operating on the PPC, a movement from point 鈥榓鈥� to 鈥榖鈥� shows an increase in the production of public goods comes from a reduction in the production of private goods.

If an economy is operating inside the PPC, a movement from point 鈥榗鈥� to 鈥榖鈥� can be done by efficiently utilizing the resources with no wastage.

Step by step solution

Drawing a production possibility curve with public and private goods

The Production Possibility Curve (PPC) shows different combinations of public and private goods that can be produced by fully utilizing the given resources and technology.

The PPC is constructed by plotting the quantity of private goods on the x-axis and the quantity of public goods on the y-axis.

Indicating an increase in the production of public goods while being on PPC

If an economy is operating on a point on the PPC, an increase in one of the goods leads to a decrease in the production of the other as the resources are already fully utilized. Thus, a movement from point 鈥榓鈥� to 鈥榖鈥�, leading to an increase in the quantity of public goods from $Y_{1} t o Y_{2}$ can only be achieved if the production of private goods decreases from $X_{1} t o X_{2}$ .

Indicating an increase in the production of public goods from a point inside the PPC to a point on the PPC

An economy operating inside the PPC is not working efficiently, and there is a wastage of economic resources. Suppose an economy is operating a point inside the PPC. In that case, an increase in one of the goods can be achieved by utilizing the existing amount of resources and technology efficiently.

Thus, a movement from point 鈥榗鈥� to 鈥榖鈥�, leads to an increase in the quantity of public goods from $Y_{3} t o Y_{2}$ along with an increase in the production of private goods from $X_{3} t o X_{2}$ . The production of both goods increases.