PPF Question

Consider an economy using two resources, land and labour, to produce two goods, food and
clothes. One of the resources is better at producing food while other is better at producing
clothes.

(i) Illustrate the concept of opportunity cost by drawing the production possibility
frontier. How do you know if the economy is using its resources efficiently?

(ii) What happens when there is a natural disaster that destroys the plantations of food?

What happens if the government allows immigrants from foreign countries so that the
labour supply increases?

Analyse each incident separately supported by a suitable production possibility frontier

diagram.

Demand, Supply & Market Equilibrium Question

The table shows the demand and supply schedules for energy bars.

Price Quantity Quantity

(dollars per demanded supplied
bar) (bars per week)
1.00 3,000 1,000
1.50 2,500 1,500
2.00 2,000 2,000
2.50 1,500 2,500
3.00 1,000 3,000

(a) What is the market equilibrium?

(b) If the price of bar is $1.50, describe the situation in the energy bar
market. Explain how market equilibrium is restored.

(c) A rise in income increases the quantity demanded by 1,000 bars a

week at each price. Explain how the market adjusts to its new
equilibrium.

(d) A fire knocks out a large energy-bar factory and a fitness craze sends
more people to the gym. How do these events influence demand and
supply? Describe how the equilibrium price and equilibrium quantity
change.