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Chapter 16: Problem 9

The Acme Corporation produces \(x\) and \(y\) units of goods Alpha and Beta, respectively. a. Use a production possibility frontier to explain how the willingness to produce more or less Alpha depends on the marginal rate of transformation of Alpha or Beta. b. Consider two cases of production extremes: (i) Acme produces zero units of Alpha initially, or (ii) Acme produces zero units of Beta initially. If Acme always tries to stay on its production possibility frontier, describe the initial positions of cases (i) and (ii). What happens as the Acme Corporation begins to produce both goods?

Short Answer

Expert verified
The willingness to produce more or less of Alpha is affected by the Marginal Rate of Transformation (MRT), which measures the number of units of Beta that need to be sacrificed to produce one more unit of Alpha. Acme's initial positions for producing zero units of Alpha and Beta are the two extremes of the Production Possibility Frontier (PPF). As they start producing both goods, they will have to sacrifice some output of one good to produce more of the other, following the PPF and subjected to MRT.

Step by step solution

01

Understanding the Production Possibilities Frontier (PPF)

A PPF is a graphical representation of all possible combinations of two goods that can be produced using available resources and technology optimally. On this curve, if a company tries to make more of one good, it can only do so by producing less of the other.
02

Determining the Willingness to Produce More or Less of Alpha

This depends on the Marginal Rate of Transformation (MRT). The MRT measures how much of item Y (Beta) we must give up to produce one more unit of item X (Alpha). If the MRT is high (meaning many units of Beta need to be given up to produce one more unit of Alpha), Acme may be less willing to increase production of Alpha. Conversely, if the MRT is low, Acme may be more willing to increase production of Alpha.
03

Discussing the Production Extremes

For case (i) when Acme produces zero units of Alpha initially, Acme is at one extreme of the PPF where they're producing only Beta. For case (ii) when Acme produces zero units of Beta, they are at the other end of the PPF, producing only Alpha.
04

What Happens When Both Goods Are Produced?

As Acme starts producing both goods and wants to stay on the PPF, it will have to sacrifice some of one good to produce more of the other. The amount to sacrifice depends on the MRT. The more Alpha they want to produce, the less Beta they can make, and vice versa.

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Most popular questions from this chapter

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