Macro Eco

Question 1:

Assume that Econoland produces haircuts and shirts with inputs of labor. Econoland has 1000 hours of labor available. A haircut requires Ѕ hour of labor, while a shirt requires 5 hours of labor. Construct Econolands PPF.

Answer 1:

To construct Econolands Production Possibility Frontier (PPF) we first need to understand what is a PPF.

A production possibilities frontier (PPF) is a graph showing the different quantities of two goods that an economy can efficiently produce with limited productive resources.

Points along the curve describe the trade-off between the two goods, that is, the opportunity cost. Opportunity cost here measures how much an additional unit of one good costs in units forgone of the other good. The curve illustrates that increasing production of one good reduces maximum production of the other good as resources are transferred away from the other good.

Given:

• Econoland produces two goods

o Shirts

o Haircuts.

• 1000 hours of labor is the constraint

• Haircut requires 0.5 hours of labour

• Shirt requires 5 hours of labour

HS = Line indicating the PPF (which in this case