Imagine that a country can produce just two things: goods and services. Assume that over a given period it could produce any of the following combinations:

1)         Draw the country’s production possibility curve.

• Help to draw on Excel – follow these instructions carefully!!!
• highlight the units of services row (including the row heading)
• click on chart wizard and select line graph. click next – you should now be on step 2 of the chart wizard.
• click on the ‘series’ tab at the top of the chart wizard
• In the box labeled ‘category (X) axis labels’ click on the little red arrow icon next to this box and highlight the row of ‘units of goods’ – DO NOT highlight the heading (i.e. ‘units of goods’!)
• Click next – you should now be on step 3
• Write a suitable title and labels for your PPF. Make sure you get the axes the right way round!
• Click on next – you should be on step 4.
• Save your PPF as a separate worksheet.. Delete the key at the side (if you have one) that says ‘units of services’. Print it out

2)         The country is producing 10 units of goods and 79 units of services, what is the opportunity cost of producing another 10 units of goods?

3)         Now it’s producing 40 units of goods and 70 units of services, what is the opportunity cost of producing another 10 units of goods?

4)         Assuming that the country is currently producing 90 units of goods and 19 units of services, what is the opportunity cost of producing another 10 units of goods?

5)         Explain how the figures and your chart illustrate the principle of increasing opportunity cost.

6)         Now assume that technical progress leads to a 10 per cent increase in the output of goods for any given amount of resources. Create the new production possibility curve and print it out. How has the opportunity cost of producing extra units of services altered?

Note:    the amount of services produced stays the same

You will have to either amend your table or draw another table in order to create the new PPF.