How does the production possibilities frontier illustrate production efficiency?
What will be an ideal response?
The combinations of outputs that lie on the PPF illustrate the concept of production efficiency. These points are the maximum production points possible and are attained only by producing the goods and services at the lowest possible cost. Any point inside the frontier reflects production where one or both outputs may be increased without decreasing the other output level. Clearly, such points cannot be production efficient.
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What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency?
What will be an ideal response?
If a local shop buys a used motorcycle for $1,000, makes repairs and refurbishes it, then resells it for $2,500, the
a. shop contributes value added equal to $1,500, but nothing is added to GDP. b. shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP. c. shop contributes nothing to production because only existing goods are involved. d. shop contributes value added equal to $2,500, but only $1,500 is added to GDP.