Question 1a) Ab) CQuestion 2a) According to the opportunity cost (OC) formula the OC of a specified good (good X on the x axis) is given by the loss in Y (good on the y axis) divided by the gain in X. For a self-sufficient economy where the PPC is a straight line, the gradient of the slope replicates the OC formula for goods on the x axis. The gradient is calculated by dividing the rise (y intercept) by the run (x intercept), which is the same as the OC formula for a good measured on the x axis, (loss in Y over the gain in X). For this reason, the slope of the PPC gives the opportunity cost of producing one unit of the good depicted on the x-axis.

b) In part a, the PPC is a straight line reflective of a one agent economy where only the opportunity cost of that single agent is considered. A PPC that is bow shaped reflects a multi-agent economy that is affected by the input of more resources (e.g. more countries producing the goods). Some resources (e.g. workers) are relatively better suited to producing a particular good (e.g. wool) while other are better at the other (e.g. cotton), meaning they have a lower opportunity cost. Because this is a multi-person economy if it was originally producing only wool and it now wants to produce cotton as well, it has the choice of assigning the job to one of the workers with the lowest opportunity cost first before turning to resources that have a higher cost. This reflects the principle of increasing opportunity costs which involves first employing those resources with the lowest opportunity cost before using resources with higher cost when increasing the production of any good. The bow shaped PPC reflects this principle as unlike the one agent economy which joins in a straight line, it keeps shifting as the initial resource with the lowest opportunity cost is exhausted and then replaced with the next lowest and so forth.

c) Because there are many agents in this economy, the PPC may bow if it abides by the low-hanging-fruit-principle and efficiently directs its resources (in this case labour) that have the comparative advantage to produce the chosen good first before passing it on to those with higher costs. The slope will begin to bow as labour with the lowest opportunity cost is redirected, making the economy more productive which will lead to increased output causing the PPC to shift. Simultaneously it means the opportunity cost of producing the corresponding good will rise due to the scarce resources so the PPC will shift outwards.

Question 3a) Oliver and Nellie produce two products, cloth and wine. The rates of production is summarised in the table below.OliverNellie

Cloth (meters) 1 meter per 30 minutes1 meter per 60 minutes

Wine (litres)1 litre per 15 minutes1 litre per 12 minutes

b) Oliver has absolute advantage in producing cloth as he is able to produce it with less resources (i.e. a shorter time of 30 minutes/meter of cloth) than Nellie (who takes 60 minutes/meter of cloth) as seen in the table above

Opportunity cost of producing: 1 meter of cloth1 litre of wine

Oliver Cost of cloth/cost of wine30/15= 2 litres of wine Cost of wine/cost of cloth15/30= 0.5 meters of cloth

NellieCost of cloth/cost of wine60/12= 5 litres of wine Cost of wine/cost of cloth12/60= 0.2 meters of cloth

Oliver has a comparative advantage in producing cloth because he has a lower opportunity cost than Nellie. This is reflected in the table above which shows for the production of 1 metre of cloth, Olivers opportunity cost is 2 litres of wine and Nellies is 5 litres.

c) Under the principle of comparative advantage it is best for each agent to specialise in the production of the good where the opportunity cost is the lowest. This is because the gains from specialization grow larger as the difference in opportunity cost increases. To ensure that these gains are attained, Nellie should specialize in the production of wine which she has comparative advantage in. In the production of 1 litre of wine, she only forgoes 0.2 meters of cloth as opposed to giving up 5 litres of wine to produce 1 meter of cloth.

Question 4a) The production possibility curve is a graphical representation of all possible production outputs of two (or more) goods in an economy when available resources are employed at maximum efficiency. The attainable production points are those on and to the left of the PPC.