Two countries Play land and Work land have similar populatio

Two countries, Play land and Work land have similar populations, identical PPCs but different preferences. The two countries production possibilities are

Point

Capital Goods

Consumption Goods

A

0

20

B

1

19

C

2

17

D

3

14

E

4

10

F

5

5

G

6

0

a. Play land’s economy is currently located on point B on the PPC, and Work land’s economy is currently located on point E on the PPC

b. What are Work land’s opportunity costs of consumption goods in terms of capital goods?

c. What are Play land’s opportunity costs of capital goods in terms of consumption goods?

d. How would the PPC for these two countries be expected to compare to each other fifty years in the future?

Solution

(a) Play land\'s economy is currently located on point B on the PPC which indicates that, at present, Playland is producing 1 unit of capital good and 19 units of consumption goods.

Work Land\'s economy is currently located on point E on the PPC which indicates that, at present, WorkLand is producing 4 units of capital goods and 10 units of consumption goods.

(b) WorkLand is producing 4 units of capital goods and 10 units of consumption goods.

The WorkLand\'s opportunity cost of producing 1 unit of consumption good is (4/10) 0.4 units of capital good.

(c) PlayLand is producing 1 unit of capital good and 19 units of consumption goods. The PlayLand\'s opportunity cost of producing 1 unit of capital good is (19/1) 19 units of consumption goods.

(d) WorkLand is producing higher number of capital goods than the PlayLand. This higher production of capital goods implies that productive ability of WorkLand will increase at greater pace than the productive ability of PlayLand because capital goods aid production.

Higher productivity will enable the WorkLand to produce more over time in comparison to PlayLand and therefore PPC of WorkLand will shift more outward than PPC of PlayLand.

So, given the current investment in capital goods, PPC of WorkLand in comparison to PPC of PlayLand will shift more outward fifity years in future.