1.6 Production Possibilities Model

What are the three simplifying assumptions in the production possibilities model?

Full employment, fixed resources, and fixed technology.

What do pizzas and industrial robots represent in the model?

Pizzas = consumer goods (satisfy wants directly); Robots = capital goods (satisfy wants indirectly by enabling future production).

What does each point (A–E) on the production possibilities table represent?

A specific combination of pizzas and robots produced using all available resources.

What is the opportunity cost of moving from A to B?

1 robot for 1 pizza.

What happens to robot production as pizza production increases from A to E?

Robot production decreases—illustrating opportunity cost.

What does the PPC show?

The maximum combinations of two goods that can be produced with full employment and fixed resources/technology.

What do points inside, on, and outside the PPC represent?

Inside = underutilization; On = efficient use; Outside = unattainable with current resources.

Why is the PPC bowed outward?

Due to the law of increasing opportunity costs—resources are not perfectly adaptable.

What does the law of increasing opportunity costs state?

As production of one good increases, the opportunity cost of producing additional units rises.

Give an example from the table showing increasing opportunity costs.

From B to C: 1 more pizza costs 2 robots; from C to D: 1 more pizza costs 3 robots.

What determines the optimal output of a good?

Where marginal benefit (MB) equals marginal cost (MC).

Why is 200,000 pizzas the optimal quantity?

At that point, MB = MC; producing more would result in MC > MB, reducing net benefit.

What happens if pizza production exceeds 200,000?

Marginal cost outweighs marginal benefit—inefficient allocation.

At optimal output (200,000 pizzas), how many robots are produced?

7,000 robots—point C on the PPC.