There is a firm manufacturing baby clothes. It is facing a dilemma. It can either make 40 pairs of tops & bottoms and 25 caps or 35 pairs of tops & bottoms and 35 caps because of thread availability and the given machines. The firm took the final decision by researching market and identifying the product with more current demand.
What do you think made the firm to choose between alternative combinations/ what assumptions are inherent in above case?
Answer & explanation
Correct answer: option 4
The Correct Answer is option 4 : All of above
Here's a breakdown of why each assumption is valid:
- Resources are fixed and given and the state of technology is constant: The problem states that the firm has a limited amount of thread and specific machines available. Additionally, it doesn't mention any changes in technology that could affect production capacity.
- Resources are not equally efficient in production of all products: The firm can't produce 40 sets of clothes and 35 caps simultaneously. This suggests that the resources (thread, machines, labor) might be more efficiently used in producing one combination over the other.
- Only two goods can be produced: The scenario presents a choice between producing two combinations of just two goods (tops & bottoms, caps). The firm can't produce other types of clothes due to resource constraints.
These assumptions together create a situation of production possibility frontier (PPF). The PPF depicts the different combinations of two goods an economy (or in this case, a firm) can produce with its limited resources. The firm's decision reflects its movement along this frontier based on market demand.