Question

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

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

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

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

 From the previous analysis, you can determine that as Carlos increases his production of trains, his opportunity cost of producing one more train _______ 

 Suppose Carlos buys a new tool that allows him to produce twice as many trains per hour as before, but it doesn't affect his ability to produce puzzles.

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

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

Answer 1

(I) PPF

(II)

From point D, Opportunity cost of another train = Puzzles given up = 15 - 13 = 2

(III)

From point C, Opportunity cost of another train = Puzzles given up = 13 - 8 = 5

(IV)

Opportunity cost Increases.

(V)

PPF will shift outward along horizontal axis only.

(VI)

Using new PPF,

When train = 2, Opportunity cost of another train = Puzzles given up = (15 - 13) / (4 - 2) = 2/2 = 1

When train = 4, Opportunity cost of another train = Puzzles given up = (13 - 8) / (8 - 4) = 5/4 = 1.25

Opportunity cost is Higher.