High Order Thinking Skills Questions - Introduction Micro Economics - Economics Class

Q.1. Explain the properties of the Production Possibility Curve (PPC). (Delhi 2010c)
Ans. The Production Possibility Curve (PPC) has two main properties:

• Downward Sloping: The PPC slopes downwards, indicating that to produce more of one good, the production of another good must be reduced. This happens because resources are scarce and must be reallocated from producing one good to producing another, creating a trade-off.
• Concave to the Origin: The PPC is shaped like a curve that bows outwards. This means that as production of one good increases, the opportunity cost of producing additional units of that good also increases. In other words, resources are not equally suited to producing all goods, so shifting resources gradually becomes less efficient. A straight line PPC would imply constant opportunity costs; the typical bowed-out shape represents increasing opportunity costs.

Q.2. Does massive unemployment shift the PPC to the left?

Ans.Massive unemployment does not shift the Production Possibility Curve (PPC) to the left. Instead:

• Massive unemployment means resources, especially labour, are underutilised. The economy moves from a point on the PPC to a point inside the PPC, showing lost potential output.
• The PPC itself shifts to the left only when there is a permanent reduction in the economy's capacity - for example, loss of resources, a decline in the labour force, widespread natural disaster, or deterioration of technology or capital.
• Thus, unemployment reduces actual output (a movement inside the PPC) but does not by itself change the economy's maximum possible output (the PPC position) unless it leads to long-term loss of resources or productivity.

Q.3. What does the slope of PPC show?
Ans. The slope of the PPC (Production Possibility Curve) shows:

• The marginal opportunity cost - that is, how much of one good must be given up to produce an additional unit of the other good.
• Numerically, the slope at any point is the rate of change of one good with respect to the other (ΔY/ΔX). Because the PPC slopes downward, the slope is negative; its absolute value gives the opportunity cost.
• As production shifts along a concave PPC, the slope changes, reflecting that opportunity cost typically increases as more of one good is produced.

Q.4. Unemployment is reduced due to the measures taken by the government. State its economic value in the context of the Production Possibilities Frontier.

Ans. When the government takes measures to reduce unemployment, the economy can use its resources more effectively. The economic value is shown as follows:

• There is a movement from a point inside the PPC to a point on the PPC, indicating higher utilisation of available resources.
• This movement leads to increased output and higher income without changing the PPC itself.
• If the measures also improve the quality of resources (for example, through training) or increase productive capital, they can raise the economy's capacity and may cause the PPC to shift outward in the long run.

Q.5. From the following PP schedule calculate MRT of good x.

Ans. To calculate the Marginal Rate of Transformation (MRT) of good X, follow these steps:

• Identify the production possibilities of the economy for goods X and Y.
• Determine the change in the quantity of good Y that can be produced when one additional unit of good X is produced.
• Use the formula: MRT = ΔY / ΔX, where ΔY is the change in the quantity of good Y and ΔX is the change in the quantity of good X.
• The result will give you the MRT, indicating the rate at which good Y can be transformed into good X.