ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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5. Opportunity cost and production possibilities
Raphael is a skilled toy maker who is able to produce both trucks and kites. He has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of his time.
Choice
|
Hours Producing
|
Produced
|
||
---|---|---|---|---|
(Trucks)
|
(Kites)
|
(Trucks)
|
(Kites)
|
|
A | 8 | 0 | 4 | 0 |
B | 6 | 2 | 3 | 10 |
C | 4 | 4 | 2 | 16 |
D | 2 | 6 | 1 | 19 |
E | 0 | 8 | 0 | 20 |
On the following graph, use the blue points (circle symbol) to plot Raphael's initial production possibilities frontier (PPF ). ( attached image)
Suppose Raphael is currently using combination D, producing one truck per day. His opportunity cost of producing a second truck per day is( 1, 3, 16, 19 kites) per day.
Now, suppose Raphael is currently using combination C, producing two trucks per day. His opportunity cost of producing a third truck per day is ( 1,6,10, or 16 kites) per day.
From the previous analysis, you can determine that as Raphael increases his production of trucks, his opportunity cost of producing one more truck ( increase, decreases, or remain constant) .
Suppose Raphael buys a new tool that enables him to produce twice as many trucks per hour as before, but it doesn't affect his ability to produce kites. Use the green points (triangle symbol) to plot his new PPF on the previous graph.
Because he can now make more trucks per hour, Raphael's opportunity cost of producing kites is( lower than, higher that, or the same as) it was previously.
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