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Production Possibilities Curve and Free Markets

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Problem #1: Using either a graph or table, use two goods to construct a production possibilities curve. Clearly explain what a variety of different points on the curve mean. What would make the curve expand or contract? Why is efficiency lost at the extremes, as when substantially more of one good and very little of another is produced?

Problem #2: Select a social problem where free markets are not allowed to function and describe how free market features could be introduced to help alleviate the problem. As part of your answer also include a discussion of the risks of introducing market mechanisms in situations where ethical issues are present

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Solution Summary

Construction of a production possibilities curve and explanation of what it represents. Description of how the free market can be used to solve a social problem.

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To construct a PPF, we first imagine a society that produces only two commodities - X, a necessity good (food) and Y, a luxury good (music and entertainment). Suppose that the labor force consists of 100 workers. One laborer can produce either 5 units of necessity per month (by hunting and gathering) or 10 units of entertainment per month (by writing songs, singing, dancing, and so on). Some workers are naturally more suited to hunting, while others are gifted entertainers. When the entertainers are forced to hunt, naturally some productivity is lost. On the other hand, if hunters are required to sing, very little additional entertainment might be produced (unless hearing people sing off key is entertaining).

The situation can be graphed as shown in the attached file. The intersection of the PPF with the y axis gives us the amount of entertainment that could be produced if all labor is dedicated to that activity. The intersection of the PPF with the x axis ...

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