ECO 1000 RC Executive of A Ne

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Instructions

You are a junior executive of a new cellular phone carrier called Technologies of the Future (TOF) that competes in the same market as Verizon Wireless, AT&T, and T-Mobile. You are tasked with writing a business report for the Committee Board Members of TOF, proposing to either expand or remain at the current level of production. The goal of your research is to determine the firm’s efficiency and how additional market shares could be acquired. Your findings are crucial to the firm. Write a professional business report that addresses the following key points.

  • Discuss how the four factors of production relate to the Production Possibilities Curve.
  • If TOF had the choice to either produce consumer goods or capital goods, explain what is meant by the Production Possibilities Curve, and explain points that would be efficient and inefficient, as well as an unattainable point.
  • Discuss how inefficient and unattainable can be experienced.
  • Define Comparative and Absolute Advantage.
  • State whether TOF has a comparative or absolute advantage if they possess over 30% of the domestic market in the United States. (Note: we are discussing the production and sale of smartphones and service plans by TOF in the United States only.)

    Production Possibilities Curve

Throughout this module, you will be learning about resource allocation and international trade.

A country’s economy needs to be flexible while also carefully managing the resources that help create its foundation. For a country’s economy to grow and thrive, the resources need to be allocated to provide the basis for trade. The factors of production are the means by which a country can manufacture and produce goods and services.

The four factors of production are as follows: land, labor, capital, and entrepreneurship. These factors are involved in many aspects of the economy. For example, the agricultural industry is dependent on land, the pharmaceutical industry is dependent on labor, the automotive industry is dependent on capital, and new emerging markets are dependent on entrepreneurship.

The Production Possibilities Curve illustrates whether a country is operating at an efficient manner while utilizing the four factors of production. The Production Possibilities Curve shows the production of two goods produced by a country, and this measurement helps determine the terms of trade. Please refer to the graph below which shows efficient, inefficient, and unattainable points based on the points on the graph.

Figure 1. Production Possibilities Curve

Figure 1 illustrates a trade-off between the production of planes and cars on the x and y-axis. Any point that lies on the curve, including points A, B, C, D, E, F, and G, represents an efficient point. W represents an inefficient point that is inside the curve. An inefficient point implies that a producer is not using land, labor, and capital in an efficient manner. The causes of inefficient points include higher levels of employment and firms that abandon factories at a domestic level to relocate overseas. X presents an unattainable (or impossible) point that is outside the curve. An unattainable point can be reached if a country can push out their Production Possibilities Curve to a higher level of production. Unattainable points can be reached by any of the following: an increase in population, advanced technology, training and education, new emerging markets, and exploitation of natural resources at a domestic level.

Do you know or wonder why the Production Possibilities Curve is bow-shaped? The Production Possibilities Curve is bow-shaped because of the law of increasing costs. A bow-shaped Production Possibilities Curve implies that costs per unit increase as quantity is increased; therefore, additional labor, capital, or land costs rise as each additional unit is produced. This explains why the Production Possibilities Curve is bow-shaped.

It is important to understand the concept of the Production Possibilities Curve because it is the basis for resources and international trade including labor, land, capital, and entrepreneurship. A country that is operating on their Production Possibilities Curve is utilizing its resources to the fullest capacity, which include the four factors of production. Countries will specialize in the production of goods in which they have a comparative advantage based on the four factors of production.

International Trade

International trade is the basis for specialization and trade among countries. Specialization refers to productivity and efficiency that is represented by the Production Possibilities Curve (Frontier).

Specialization is based on absolute and comparative advantage.

Absolute advantage refers to a country’s ability to produce similar goods and services to that of other countries but with fewer inputs.

Comparative advantage refers to a country’s ability to produce goods and services to that of other countries but with lower opportunity costs.

Production Possibilities Curve

The Production Possibilities Curve (Frontier) plays an important role in the world of international trade. Countries are able to determine which type of goods they will export based on comparative and absolute advantage.

Please see the graph and tables below that show the Production Possibilities Curve for two countries, China and United States, given two outputs:

From the tables above one can tell that China can either produce 80 units of textiles or 80 units of technology; whereas, the United States can produce 70 units of textiles or 65 units of technology based on the factors of production. The chart shows the opportunity cost which is the highest good or the highest value good forfeited in order to obtain another good. Points B, C, D, and E would not be chosen because they indicate that the country is not using resources to the fullest.

The question is whether or not China and the United States should engage in trade? Yes, both countries should engage in trade as it allows a country to specialize in a good or service, to strengthen political policies, to increase goods for consumption, and to increase a country’s ability to generate revenues.

Now, the question that arises is which country should trade units of textiles for units of technology? Due to the fact that China has a comparative and absolute advantage in the production of textiles and technology, it can efficiently exchange either good. The United States has a comparative and absolute advantage in the production of textiles as it can either produce 70 units of textiles or 65 units of technology; therefore, the United States should trade units of textiles, and China should in turn trade with the United States units of technology. This conclusion is reached through the analysis of the comparative and absolute advantage as depicted in the tables above.


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