Question

Lorenzo 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	11
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 Lorenzo's initial production possibilities frontier (PPF).

30 25 20 15 LU 10 TRUCKS 7 8 Initial PPF New PPF

Suppose Lorenzo is currently using combination D, producing one truck per day. His opportunity cost of producing a second truck per day is ___ per day.

Now, suppose Lorenzo is currently using combination C, producing two trucks per day. His opportunity cost of producing a third truck per day is___ per day.

From the previous analysis, you can determine that as Lorenzo increases his production of trucks, his opportunity cost of producing one more truck ____ .

Suppose Lorenzo buys a new tool that allows 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, Lorenzo's opportunity cost of producing kites is ____ it was previously.

Answer 1

Initial PPF

25 20 15 Kites 10 0 1 4 Trucks

Answer to blank 1: 3 kites   ( i.e. 19 - 16)

Answer to blank 2: 5 kites   ( i.e. 16 - 11)

Answer to blank 3: increases

New PPF

25 20◆ 15 Kites 10 5 0 6 8 10 2 4 0 Trucks

Answer to blank 4: higher than

Explanation:

Suppose befor the new tool is used, take for example the producer produces combination A (i,e. 4 trucks and 0 kites). Suppose the producer shifts to combination B (i.e. 3 trucks and 11 kites). Here the opportunity cost of 1 kite = (4 - 3) / 11 = 0.09 trucks.

Now after new tool is used, take for example the producer produces combination A (i,e. 8 trucks and 0 kites). Suppose the producer shifts to combination B (i.e. 6 trucks and 11 kites). Here the opportunity cost of 1 kite = (8 - 6) / 11 = 0.18 trucks.

I means opportunity cost is higher than it was previously.