A furniture producer is operating on its production possibility curve, making 400 chairs and 200 tables each month. Demand for tables rises. The firm can mo...
Question 1 Report
A furniture producer is operating on its production possibility curve, making 400 chairs and 200 tables each month. Demand for tables rises. The firm can move workers and wood from chair production, or invest in additional machinery.
(a) What does operating on a production possibility curve show about the firm's use of resources? [2]
(b) Explain why increasing table output without investment is likely to have an opportunity cost. [2]
(c) Analyse how additional machinery could change the firm's production possibility curve. [3]
(d) Assess whether the firm should immediately invest in the machinery. [2]
Answer Details
- (a) Operating on the production possibility curve means resources are fully employed / used efficiently. [1] The firm is producing the maximum feasible combination of chairs and tables. [1]
- (b) Workers and wood are limited. [1] Without investment, making more tables requires resources to move from chairs, so chair output falls. [1] The lost chairs are the opportunity cost.
- (c) Additional machinery increases the firm's capital stock. [1] It can raise productive capacity or productivity. [1] Therefore, the production possibility curve shifts outward, allowing more chairs and/or tables. [1]
- (d) Immediate investment may be justified if higher table demand and expected profit are sustained. [1] However, it may be unsuitable if machinery is costly, demand is temporary, or the firm lacks finance. [1]
A balanced judgement depends on whether the likely long-term extra revenue exceeds the cost and risk of the machinery.
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