CAF Inc Economic Problems: Solved

CAF Inc Economic Problems: Solved


This is a critical thinking-based paper, which seeks to understand how economists, firms and individuals can make the decision when faced with scarce resources. The paper mainly concentrates on the opportunity cost that a firm or individual might be willing to accept for the production of another good. The first question explores how the firm can decide on the production of two goods: milk and cars, using scarce resources. It is established that due to limited resources, the firm can only increase the production of one commodity by decreasing the production of the other. The second question calls for the application of critical thinking to decide on the least opportunity cost that the project should afford to lose. Third question debates on whether Economics is Science and concludes that it is a science since both disciplines involve understanding relations and behavior of structures in the physical environment.

Q1. CAF Inc. is producing two goods: cars and milk. The following table gives several points on its production possibility frontier.

Cars (1000’s/year) Milk (1000’s of gallons/ year)
0 60
1 50
2 30
3 0

a. Graph this on production possibility frontier. (1.5 Marks)

b. Why is the production possibility frontier downward sloping? Be sure to explain economic intuition behind that fact. (3Marks)

The PPF slope denotes the opportunity cost between the combination of two goods. PPF demonstrates that all resources are fully used, and the firm produces more quantities of a particular good by forgoing the production of the other. The principles of opportunity cost and scarcity lead to the creation of the PPF curve, which slopes downward, and it is always negative since there is a tradeoff between the two goods (Mert, 2018). The downward sloping PPF is usually attributed to the law of diminishing marginal returns. The law stipulates that for an increase in each variable of production, for example, labor, the increase in output continues to diminish by becoming smaller and smaller (Mert, 2018). For example, from the graph to move from 0 to 1000 cars requires forgoing 10,000 gallons of milk, but to move from 1000 to 2000, cars require forgoing 30,000 gallons of milk. From the PPF graph, it is evident that the production of one good can only increase when the production of the other good is decreased.

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c. Suppose the firm is currently producing 2000 cars and 30,000 gallons of milk. What is the opportunity cost of producing additional 20,000 gallons of milk? (3Marks)

From the PPF graph, producing 50,0000 (30,000 + 20,000) gallons of milk leaves the firm with the resources that can only produce 1000 cars since, at 50,000 milk production in the y-axis, only 1000 cars can be produced in the x-axis. Currently, the firm is producing 2000 cars. With additional 20,000 gallons of milk, the firm can only produce 1000 cars. Therefore, the opportunity cost will be 1000 cars (2000 – 1000).

d. Give an example of opportunity cost principle from everyday experiences of economic activities (1.5 Marks)

If an individual decides to quit the job to enroll for a masters’ degree. The opportunity cost is the benefit associated with the job.

Q2. A team consisting of three people working on a big project, which involves manual entry of data in a computer, with subsequent processing of these data and making a poster presentation. Naturally, each member of the team has different abilities in performing either task. Amna can make one poster or 400 data entries in a day. Hard-working Zeba can make two posters or 1200 data entries in a day. Artistic Ibraheem can make three posters or 900 entries in a day.
a. Initially, the entire team (each of them having their own personal computer) starts with entering data. How many entries will be made in a day? (2Marks)

b. As the time comes to start making posters, you decide to assign one member of the team to this task. Whom would you choose? Explain why? (2.5Marks)

c. As you make this decision, what is the opportunity cost of each poster made? (1.5Marks)

d. As there is less and fewer data remaining to be entered, another person can shift to making posters as well. Which of the remaining two members of the team will you choose this time? Explain your choice. As a result, what is the opportunity cost of each additional poster you will get? (2Marks)

Q3. Is Economics a science? Why, or why not? As part of your response and explanation, include the definitions of “science” and “economics” as you understand them. (3Marks)

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