Question

Suppose the United States can produce two goods, cloth and tea. Suppose there was a technological breakthrough in making cloth ONLY. Would the PPF curve shift inward or outward in this case and can we indirectly allocate resources from cloth to tea production along the new PPF curve? Explain. Please draw and the label the initial PPF curve PPF 1 and then please draw the new PPF curve PPF 2. Please draw an arrow to indicate the shift in the PPF curves. Also, put tea on the y-axis and cloth on the x-axis.

Answer 1

PPF will rotate rightward by technological breakthrough in making cloth only

Step-by-step explanation:

PPF is the graphical representation of two goods, that an economy can produce with given resources & technology.

If there is a technological breakthrough in only one good (cloth here) in economy (US here). The new PPF shift outward (rightwards or upwards) only on the axis representing that particular good (on x or y axis respectively). As cloth is on x axis, the PPF will rotate rightward by technological breakthrough in making cloth only.

Yes, on new rightward rotated PPF also, cloth & tea can be traded off, but at an altered slope & marginal opportunity cost (sacrifise ratio).