Why might you suspect that the economy might not be able

Question:

Write direct answers for each part of each question - eg.

(a) An economy may not be able to produce all the beds and all the schools it wants because

Answers should be typed, though graphs may be drawn in WORD or scanned.

When using a graph, be careful to carefully label each axis and curve. A graph that is carefully drawn to scale is more easily interpreted.

Ensure that your name and student number are recorded on each page of your assignment (a footer is recommended).

Scenario:

You have been hired as the economics adviser for the newly elected State Premier. On your first day, the Premier introduces you to the new Minister for Health and the Minister for Education and Training, and explains that your expertise is needed to settle a policy debate.

The Minister for Education and Training wants to educate and develop the skills of young people, and so wants to build 6 new technical schools. The Minister for Health wants to reduce hospital waiting lists by producing 5,000 new hospital beds. The Premier asks you if this is possible. You are unsure, and question whether the economy has the resources to do both.

The Minister for Education and Training says he won't accept less than 5 new technical schools. The Minister for Health says she will agree to no less than 4,500 new hospital beds. The Premier says that this compromise of 5 schools and 4,500 beds seems fair. You then calmly suggest that before a policy is announced, it might be worthwhile working out what is actually possible. Before the Cabinet Meeting at 10.00 am tomorrow morning, you have to write a report that answers the following questions:

(a) Why might you suspect (even without evidence) that the economy might not be able to produce all the schools and beds it wants ?

What constraints are there on an economy's production?

(b) The Premier provides you with the following production possibilities data recording possible combinations of schools and beds produced over the past year.

Technical Schools - Hospital Beds
0                    5,000
1                    4,800
2                    4,400
3                    3,900
4                    3,000
5                    1,800
6                        0

Given this information, draw a production possibilities curve (PPC) for the economy, labelling the axes and each combination.

Explain why the line is curved and not straight, with reference to the concept of opportunity cost.

Were you right to suspect the economy could not produce 6 schools and 5,000 beds at once? Explain why.

(c) Explain the concepts of efficiency and inefficiency in relation to the PPC.

Consider the Minister for Education and Training and the Minister for Health's second choices, of 5 schools and 4,500 beds, and mark it on your graph. Is this combination possible or efficient? Explain.

(d) The Premier wants to improve all possible and efficient outcomes, to keep the people happy with the government. He understands that this year's production is restricted, but next year he wants to produce both 6 technical schools and 5,000 hospital beds . Describe two different changes in the economy that could make this possible.

(e) Explain in just a few lines, if it were up to you, which combination of technical schools and hospital beds you would choose to produce, and why. In terms of kinds of economic analysis, what makes your answer for (e) different to the answers for (a( to (d)?

Are other economists likely to agree with your analysis in parts (a) to (d) ? Are they likely to agree with your preferred choice in (e)? Explain.