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Business Economics (BUS1BUE) Workshop 1 Suggested Solutions to Problems 1. Production possibilities and opportunity cost (Text p.47 Q’s 1, 2, 3, and 4) Use the following information to work Problems 1 to 3. Australia produces ethanol from sugar cane, and the land used to grow sugar cane is used to grow food crops. Suppose that Australia’s production possibilities for ethanol and food crops are as in the table. Ethanol (barrels per Food crops (tonnes per day) day) 70 64 54 40 22 0 and and and and and and 0 1 2 3 4 5 1.a.Draw a graph of Australia’s PPF and explain how your graph illustrates scarcity. Figure 2.1 shows Australia’s PPF. The production possibilities frontier indicates scarcity because it shows the limits to what can be produced. In particular, production combinations of ethanol and food crops that lie outside the production possibilities frontier are not attainable. b. If Australia produces 40 barrels of ethanol a day, how much food must it produce to achieve production efficiency? If Australia produces 40 barrels of ethanol per day, it achieves production efficiency if it also produces 3 tonnes of food per day. 1 c. Why does Australia face a tradeoff on its PPF? Australia faces a tradeoff on its PPF because Australia’s resources and technology are limited. For Australia to produce more of one good, it must shift factors of production away from the other good. Therefore to increase production of one good requires decreasing production of the other, which reflects a tradeoff. 2.a.If Australia increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of the additional ethanol? When Australia is production efficient and increases its production of ethanol from 40 barrels per day to 54 barrels per day, it must decrease its production of food crops from 3 tonnes per day to 2 tonnes per day. The opportunity cost of the additional ethanol is 1 tonne of food per day for the entire 14 barrels of ethan