11. The cost disease of personal services Everyone on the small island of Narcissus is very concerned with image. In fact, the island has only two industries: beauty salons and shirt manufacturing. It exports its (extremely fashionable) shirts to the rest of the world, and imports the rest of the goods it needs (food, energy, gel, mousse, and so on). The world price of Narcissian shirts is constant at $80. Over the past few years, advances in the technology of shirt manufacturing have doubled the shirt-manufacturing capacity of the island. However, the number of haircuts that can be given in beauty salons is limited by the fact that haircuts are personal services; hence, given the same population, exactly the same number of haircuts can be produced as before. The following graph shows the daily production possibilities frontier (PPF) of this economy before and after the technological advance: SHIRTS(Thousands per day) 10 9 8 7 0,4.5 2 1 0 New PPF 0 Old PPF 1 M (X +0 6 7 2 3 4 HAIRCUTS (Thousands per day) 9 10 Suppose the economy is producing 4,000 haircuts a day. Before the technology improvement, the opportunity cost (in dollar amount of lost exports) of producing another thousand haircuts each day (that is, moving from point M to point L) was $160,000 per day. After the technology improvement, the opportunity cost (in dollars of lost exports) of increasing production from 4,000 haircuts to 5,000 haircuts each day (that is, moving from point Y to point X) was $80,000 per day. The fact that a technological improvement has allowed twice as many shirts to be made for any given quantity of haircuts means that: O The price of both haircuts and shirts has been cut in half. O The price of a haircut has doubled relative to the price of a shirt. O The price of a shirt has doubled relative to the price of a haircut. O The price of both haircuts and shirts has doubled.
11. The cost disease of personal services Everyone on the small island of Narcissus is very concerned with image. In fact, the island has only two industries: beauty salons and shirt manufacturing. It exports its (extremely fashionable) shirts to the rest of the world, and imports the rest of the goods it needs (food, energy, gel, mousse, and so on). The world price of Narcissian shirts is constant at $80. Over the past few years, advances in the technology of shirt manufacturing have doubled the shirt-manufacturing capacity of the island. However, the number of haircuts that can be given in beauty salons is limited by the fact that haircuts are personal services; hence, given the same population, exactly the same number of haircuts can be produced as before. The following graph shows the daily production possibilities frontier (PPF) of this economy before and after the technological advance: SHIRTS(Thousands per day) 10 9 8 7 0,4.5 2 1 0 New PPF 0 Old PPF 1 M (X +0 6 7 2 3 4 HAIRCUTS (Thousands per day) 9 10 Suppose the economy is producing 4,000 haircuts a day. Before the technology improvement, the opportunity cost (in dollar amount of lost exports) of producing another thousand haircuts each day (that is, moving from point M to point L) was $160,000 per day. After the technology improvement, the opportunity cost (in dollars of lost exports) of increasing production from 4,000 haircuts to 5,000 haircuts each day (that is, moving from point Y to point X) was $80,000 per day. The fact that a technological improvement has allowed twice as many shirts to be made for any given quantity of haircuts means that: O The price of both haircuts and shirts has been cut in half. O The price of a haircut has doubled relative to the price of a shirt. O The price of a shirt has doubled relative to the price of a haircut. O The price of both haircuts and shirts has doubled.
Chapter1: Making Economics Decisions
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Problem 1QTC
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Transcribed Image Text:11. The cost disease of personal services
Everyone on the small island of Narcissus is very concerned with image. In fact, the island has only two industries: beauty salons and shirt
manufacturing. It exports its (extremely fashionable) shirts to the rest of the world, and imports the rest of the goods it needs (food, energy, gel,
mousse, and so on). The world price of Narcissian shirts is constant at $80.
Over the past few years, advances in the technology of shirt manufacturing have doubled the shirt-manufacturing capacity of the island. However, the
number of haircuts that can be given in beauty salons is limited by the fact that haircuts are personal services; hence, given the same population,
exactly the same number of haircuts can be produced as before.
The following graph shows the daily production possibilities frontier (PPF) of this economy before and after the technological advance:
SHIRTS (Thousands per day)
10
8
7
5
4
2
1
0
0, 4.5
D
New PPF
0
Old PPF
+
1
2
*
M
4
* +
(*
☐
3
5
6 7
HAIRCUTS (Thousands per day)
+
10
?
Suppose the economy is producing 4,000 haircuts a day. Before the technology improvement, the opportunity cost (in dollar amount of lost exports) of
producing another thousand haircuts each day (that is, moving from point M to point L) was $160,000 per day.
After the technology improvement, the opportunity cost (in dollars of lost exports) of increasing production from 4,000 haircuts to 5,000 haircuts each
day (that is, moving from point Y to point X) was $80,000 per day.
The fact that a technological improvement has allowed twice as many shirts to be made for any given quantity of haircuts means that:
The price of both haircuts and shirts has been cut in half.
The price of a haircut has doubled relative to the price of a shirt.
O The price of a shirt has doubled relative to the price of a haircut.
The price of both haircuts and shirts has doubled.
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