Author Question: Why does the production possibilities frontier have a bowed out shape rather than being a straight ... (Read 69 times)

Beheh · **on:** Jun 29, 2018

Why does the production possibilities frontier have a bowed out shape rather than being a straight line?

What will be an ideal response?

Question 2

The above table presents data for the nation of Economica.

a. What is the aggregate planned expenditure and unplanned inventory change at each level of real GDP?
b. At what level of real GDP is equilibrium expenditure achieved?

huda · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The fact that as the production of one good or service increases, its opportunity cost increases means that the production possibilities frontier will be bowed out. Only if the opportunity cost remained constant as the production of a good increases would the production possibilities frontier be a straight line.

Answer to Question 2

a. When real GDP is 0, aggregate planned expenditure (the sum of C + I + G + X - M) equals 4.5 trillion and unplanned inventory change (the difference between GDP and aggregate planned investment) is -4.5 trillion. When real GDP is 2.5 trillion, aggregate planned expenditure is 5.5 trillion and unplanned inventory change is -3.0 trillion. When real GDP is 5.0 trillion, aggregate planned expenditure is 6.5 trillion and unplanned inventory change is -1.5 trillion. When real GDP is 7.5 trillion, aggregate planned expenditure is 7.5 trillion and unplanned inventory change is 0. And when real GDP is 10 trillion, aggregate planned expenditure is 8.5 trillion and unplanned inventory change is 1.5 trillion.
b. Equilibrium expenditure occurs when unplanned inventory change is 0, or, equivalently, when real GDP equals aggregate planned expenditure. In this problem, equilibrium expenditure occurs when real GDP is 7.5 trillion.