Production possibility Curve

Given below is a production possibility curve for growing cereals and pulses. Answer the questions
related to this curve.

1. What is the nature of the slope and shape of the PPC. Give reason in a sentence each.
2. What is the opportunity cost (marginal rate of transformation) of moving from point E to F
and F to G. Draw a table to show the MRT.
3. What is the reason for increasing opportunity cost?
4. Consider 2 economies, A & B. B allocates more of its resources to Investment, especially in
R&D. A allocates more resources to consumer goods. Where would you see greater outward
shift in PPC over time and why?
II. Through entrepreneurial discovery and innovation, new products and methods of
production are continuously replacing old ones. Harvard economist, Joseph Schumpeter
called this creative destruction. Automobile caused demise of horse and carriage
industry, compact discs caused demise of vinyl records. It destroys some businesses and
industries but creates new and better ones in time. What possible effect can creative
destruction have on PPC.

III. In the recent trade war between China & USA, President Trump imposed tariffs on imports of
aluminium and steel from China in March. More recently, he announced a 25% tariff $50 billion
to $60 bn in Chinese exports to the US including aerospace, ICT and machinery. China in turn,
imposed duties on a wide range of US goods including scrap aluminium, sparkling wine and
apples. Trump further promised tariffs on 1300 more Chinese products. Hours later China came
out with tariffs on Boeing planes.

Trump insists that is not a trade war but a response to Chinese intellectual property theft of US
technology. China has the reputation of making knockoffs of designer brand while borrowing
technological breakthroughs.

Farmers in the US are keeping a close watch on the escalating trade war, fearing that it will pose
a threat to the rural economy.

a. Considering that China has a trade surplus with the US currently, which country is likely to
see a greater shrinkage in the PPC.
Give an example of any government policy, which according to you has a positive effect on PPC