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HOLMES INSTITUTE
FACULTY OF
HIGHER EDUCATION
    
Tutorial Submission Question 1
Assessment Question Week 2:
Production Possibility Frontier (PPF)
Question 1
In 2017, Nepal’s production of rice and machinery was published by the Nepal Bureau of Statistics (NBS) as indicated by the table below:
Production in Nepal
    Position
    P
    Q
    R
    S
    T
    U
    V
    W
    X
    Y
    Z
    Rice (1000 tons)
    0
    10
    26
    37
    45
    50
    55
    59
    66
    77
    80
    Machinery (units)
    90
    89
    85
    80
    75
    70
    65
    60
    50
    30
    0
    
    
    
    
    
    
    
    
    
    
    
    
Based on the table above, a production possibility frontier (PPF) for Nepal can be plotted as below:
Use the NBS production table and production possibility frontier to answer the following questions:
A. Name positions B, V and D. Also, as indicated in the table, supposing Nepal is operating at level T, what is the opportunity cost of producing 10,000 more tons of rice?                                    (3 marks)
Ans :

Point B - point B denotes an inefficient point. If the economy fails to use its resources fully, the result is the inefficient point B.
Point V – point v lies on the curve. All points on the curve are efficient points.
Point D – point D is an unattainable point . it lies beyond the economy’s present production capabilities and is unattainable .
Opportunity cost is the choices made by people due to scarcity and each choices incurs a cost , sacrifice. It is the best alternative sacrificed for a chosen alternative. The opportunity cost of producing 10,000 more tons of rice is the sacrifice of producing machinery for Nepal.
Use the graph below to answer the questions that follow:
B1: Suppose Nepal begins to manufacture fertilizers. Explain the impact of the discovery of fertilizers on Nepal’s economy using one of the PPF above.
(2 marks)
ANS :

When Nepal begins to manufacture fertilizers, the PPF1 shifts to PPF2 indicating more rice production. The economy begins with the capacity to produce combinations PPF2. The growth in resource base shifts the PPF outward to its right. Instead of producing at A , the economy can produce at B.
M B
A
90
    R    
0    80 100
B2: Also, supposing there is a discovery of steel in Nepal, explain the impact of steel on the economy of Nepal using one of the PPF above. (2 marks)
ANS :
When Nepal begins to manufacture steel, the PPF1 shifts to PPF3 indicating more machinery production. The economy begins with the capacity to produce combinations PPF3. The growth in resource base shifts the PPF outward to its right. Instead of producing at A , the economy can produce at B.
M
1OO
90
R
80
B3: Finally, the Minister of Finance in Nepal advices the World Bank that in order to increase rice production and machinery, each sector requires USD 50 billion, or a total of 100 billion. This 100 billion is made available by the World Bank. Explain the impact of these 100 billion budgetary allocations to the economy of Nepal. Use one of the PPF above.         (3 marks)
Ans :

When 100 billion is made available by the world bank, the PPF1 shifts to PPF4 indicating more availability of resources. The economy begins with the capacity to produce combinations PPF4. The growth in resource base shifts the PPF outward to its right. Instead of producing at A , the economy can produce...