Exploring the Production Function
1. Students often confuse production functions and production-possibilities frontiers. They are different relationships, but they are related. The following exercise illustrates their relationship.
Suppose an economy has three units of capital and four units of labor. It must use these resources to produce the only two goods it uses: food and shelter. The technology possessed in this economy is shown in the following production functions:
Notice that if resources are fixed in amount and if they are used to produce food, they cannot be used to produce shelter. If, for example, two units of capital and two units of labor are used to produce food, then only one unit of capital and two units of labor will be available to produce shelter.
Complete the production-possibilities table for this economy:
The only two changes that alter a production-possibilities frontier are changes in technology or resources. Why?