2. Assume that a certain simplified economy produces only two goods, X and Y, with

Question

given resources and technology. The following table gives the various possible
combinations of the production of the two goods (all units are measured in millions of
tons).
Production Possibility Good X Good Y Opportunity Cost of Good X
A 0 100
B 2 90
C 4 60
D 6 20
a) Calculate the opportunity cost of the production of good X at each point. What law
does the trend in those values exhibit?
b) What changes are required for this economy to shift the PPF outward?�

Answer 1

a) The opportunity cost of the production of good X can be calculated by taking the change in the quantity of good Y divided by the change in the quantity of good X.

For points A to B, the change in good Y is -10 (100 - 90) and the change in good X is 2. Therefore, the opportunity cost is -10/2 = -5.

For points B to C, the change in good Y is -30 (90 - 60) and the change in good X is 2. Therefore, the opportunity cost is -30/2 = -15.

For points C to D, the change in good Y is -40 (60 - 20) and the change in good X is 2. Therefore, the opportunity cost is -40/2 = -20.

The trend in these values shows that as more of good X is produced, the opportunity cost of producing an additional unit of good X increases. This is known as the law of increasing opportunity cost.

b) For the economy to shift the PPF outward, there would need to be an increase in resources or an improvement in technology. This would allow for more efficient production and the ability to produce more of both goods X and Y.