Question

 4. Opportunity cost and production possibilities

 Latasha is a skilled toy maker who is able to produce both trains and drums. She has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of her time.

On the following graph, use the blue points (circle symbol to plot Latasha's initial production possibilities frontier (PPF)

 Suppose Latasha is currently using combination D, producing one train per day. Her opportunity cost of producing a second train per day is _______  per day.

 Now, suppose Latasha is currently using combination C, producing two trains per day. Her opportunity cost of producing a third train per day is _______  per day.

 From the previous analysis, you can determine that as Latasha increases her production of trains, ner opportunity cost or producing one more train _______ . 

Suppose Latasha buys a new tool that allows her to produce twice as many trains per hour as before, out it doesn't affect her ability to produce drums.

 Use the green points (triangle symbol) to plot her new PPF on the previous graph.

 Because Latasha can now make more trains per hour, Latasha's opportunity cost of producing drums is _______  it was previously.

Answer 1

Latisha is currently using combination D, producing 1 train and 19 drums. If she wants to produce a second train per day then she'll be using combination C, producing 2 trains and 16 drums . Therefore, her opportunity cost of producing a second train per day is (19 - 16) = 3 drums per day.

Now she is using combination C, producing 2 trains and 16 drums per day. If she wants to produce a third train per day then she'll be using combination B, producing 3 trains and 11 drums per day. Therefore, her opportunity cost of producing a third train per day (16 - 11) = 5 drums per day.

So you can determine that, as Latasha increases her production of trains, her opportunity cost of producing one more train increases.

Suppose she buys a new tool that enables her to produce twice as many trains per hour as before, then latasha's opportunity cost of producing drums is more than it was previously, because now she has to give up more trains in order to make 1 additional drum per day.