Production Possibility Alternatives - Assignment Example

(b) At point C the cost of one more automobile over a forklift is 21/4= 5.25. production possibility curves show the increase in opportunity cost since when resources that are constant are directed towards the production of one commodity, production of the other is reduced or eliminated.
(c) If 3 automobiles and 20 forklift inefficiency will be realized since the combination will fall below the PPC hence underutilization of resources.
(d) Outside the PPC represents overutilization of the available resources hence over efficiency. For this level to arrive at technological and infrastructural development of the firm must have reached a maximum.

2. Opportunity cost is defined as the cost of the foregone alternative (Adil & Janeen 2006pg.24). Due to limited resources accompanied by the constraint on the same, there is demand for choice hence opportunity cost in economics. In the cases presented, the allocation of a square block in the heart of Toronto for a parking lot poses the greatest opportunity cost due to the demand for parking space in the city.

3. The cost of production is $(5*40+7*60+2*60+1*20) = $760. Selling price is $(400*2) = $800. The firm can therefore continue producing bread because a margin of $40 will result. The flow of factors of production to the bakery is good since it will enhance technical efficiency and effectiveness.

4. If supply decreases and demand is constant, prices will rise and quantity reduces. With lower demand and constant supply, prices fall and quantities go up. An increase in supply with constant demand leads to reduced prices by the margin of increase while quantities will flood the market. Depending on the increase in demand and supply, there will be an increase with the same proportions. If demand increases and supply remains the same, there is a constraint created hence prices go up while quantity diminishes. An increase in supply accompanied by reduced demand leads to excess goods in the market hence lowered prices with excess goods in the market. If demand increases and supply decreases, prices will drastically escalate with a steep decrease in quantity. If supply decreases alongside demand, prices and quantity would follow in the same proportion (Adil & Janeen 2006pg.57).

5. If the price falls and demand is inelastic revenue falls since quantity is constant. Price rise with elastic supply leads to an increase in revenue with the same proportion. While in this case, when supply is inelastic, a rise in prices also increases revenue (Adil & Janeen 2006pg.194).
6. Price ceilings involve the setting of prices by governments below the equilibrium price to favor the consumers while reducing supplier’s profits. Price floors involve the creation of surpluses in supplies (Adil & Janeen 2006pg.197). Products A and B are substitutes hence the increase in price for A by 1 unit will shift demand to B by 3.6 units and vice versa.