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# Short written assessment ## Problem A:

Schmeckt Gut has several production facilities in Industria with different production capacities. In District B we are producing both of our energy bars; The Schmeckt Gut Energy Bar and Schmeckt Gut 2.0. The table below summarises our production capacity:

Table 1— District D production capacity

 Schmeckt Gut Energy Bar Schmeckt Gut 2.0 30,000 0 28,000 1,000 24,000 2,000 18,000 3,000 10,000 4,000 0 5,000

1. Using the above figures and Microsoft Excel, map out the Production Possibilities Frontier (PPF) for the production of the Schmeckt Gut Energy Bar and Schmeckt Gut 2.0.

Hint A: If you are unsure how to use Microsoft Excel, review the Module 1 Learning Activities and try to replicate the examples.

Hint B: If you are unsure how to create the PPF with the help of Microsoft Excel, do a quick Google search.

1. In your own words, while making use of the graph that you have created in part 1, explain what the PPF is.
2. District D usually has a demand of 3,000 Schmeckt Gut 2.0 and 18,000 Schmeckt Gut Energy Bars. Suddenly we receive notice that the demand has increased to 4,000 Schmeckt Gut 2.0 and 20,000 Schmeckt Gut Energy Bars.
3. Discuss and explain at least three possibilities how we could meet that demand. Hint: Make appropriate assumptions.
4. For each solution that you have identified and discussed above, explain whether or not your solution is sustainable.

1. The number of possible output combinations for any two goods for a given a set of inputs that includes resources and other factors that an economy can achieve when all resources are efficiently employed is known as production possibility frontier (PPF)

The PPF indicates the production possibilities of two commodities when resources are fixed. This means that the production of a commodity X can only increase when the production of the commodity Y is reduced, due to the availability of resources. Reallocating scarce resources from one product to another involves an opportunity cost i.e. when you have to let go of something in order to get something else. Therefore, the PPF measures the efficiency in which two commodities can be produced together to decide so as to get the most beneficial mix.

If we increase our production capacity for Schmeckt Gut Energy Bars (i.e. moving along the PPF from point A to point B by looking at the graph) then fewer resources is available to produce Schmeckt Gut 2.0. If the law of diminishing returns holds true then the opportunity cost of expanding output of Schmeckt Gut Energy Bars measured in terms of lost units of Schmeckt Gut 2.0 is increasing. As more resources are allocated towards Schmeckt Gut Energy Bars the extra output gets smaller – so more of Schmeckt Gut 2.0 has to be given up in order to produce Schmeckt Gut Energy Bars.

1. It is given that District D usually has a demand of 3,000 Schmeckt Gut 2.0 and 18,000 Schmeckt Gut Energy Bars. This means that the maximum efficient production level is at Point B on the graph.
2. But then the demand has increased to 4,000 Schmeckt Gut 2.0 and 20,000 Schmeckt Gut Energy Bars. In this case, one needs to let go of 8,000 Schmeckt Gut Energy Bars in order to produce 1,000 Schmeckt Gut 2.0. If this condition is not met, then the production possibility combination will be on the right of the curve, which is not efficient.

Let us consider points C, D and E as the production possibility combinations.

By looking at Point A and Point B, we see that 4,000 Schmeckt Gut 2.0 bars are produced whereas for the same number of Schmeckt Gut 2.0 bars being produced, the production of Schmeckt Gut Energy Bars has increased. The demand could be met by increasing productivity of the Schmeckt Gut Energy Bars keeping the production of Schmeckt Gut 2.0 constant, or maybe moving to a higher PPF by increasing the inputs.

1. If let's suppose, we produce at point C, then that is the output combination which is not attainable. However, if we produce at Point D and E, then these points are the inefficient combinations where the resources are not utilized fully. Although all the combinations will give outputs that will make use of given inputs but then we need to maximize the production which can only happen by staying on PPF curve.

## Problem B:

At a local market in Industria, the following demand and supply information are given:
Demand for energy bars: P = 800 - 2QD
Supply for energy bars: P = 200 + 1QS

1. What are the market equilibrium price and quantity?
2. If the subsequent price increases by \$1, how does demand and supply change? Explain with the help of the concepts of the law of demand and supply.

1. Given:
Demand for energy bars: P = 800 - 2QD
Supply for energy bars: P = 200 + 1QS
In equilibrium, the quantity demanded will equal the quantity supplied, i.e., QD = QS = Q Demand for energy bars: P = 800 - 2Q
Supply for energy bars: P = 200 + 1Q
Now equating both the demand and the supply,
800 - 2Q = 200 + 1Q
800 - 200 = Q + 2Q
600 = 3Q
Q = 200
Therefore, the equilibrium quantity is 200.
Now, P = 800 - 2Q
Plugging the value of Q,
P = 800 - 2(200)
P = 800 - 400
P = 400

Hence, the equilibrium quantity is 200 whereas the equilibrium price is \$4.

1. According to the law of demand, if the price increases then the demand goes down for a normal good (Marshall, 1890). Therefore, if the price were to increase by \$1, then, the equilibrium price will be \$5.
Demand for energy bars: P = 800 - 2Q
500 = 800 - 2Q
Q = 150
Hence, the quantity changes to 150 to meet the equilibrium when the price increases by \$1

#### References

• Marshall, A. (1890). Principles of Economics. MacMillan & Co, London 