Question

Draw a PPF showing decreasing opportunity costs. Show how the slope of the decreasing opportunity costs PPF indicates the opportunity cost of the good on the horizontal axis (HINT: start by defining "slope"; then showing slope on the PPF; then describing how that is exactly the definition of the opportunity cost of the good on the horizontal axis!) Can you think of goods which fit this type of PPF (one for each axis)? You are required to use Draw.io

Answer 1

The figure for decreasing the opportunity cost is shown below:

Banana -100 Decreasing Opportunity cost 200 + 100 + V -60 in 40 1 2 3 4 5 6 Apple

The Slope of the PPF is called the Marginal Rate of Transformation. It is defined as the rate at which the production of one good can be reallocated into the production of other good.

As described in the above figure, initially the consumer is giving up 100 units of banana to get 1 additional apple. Afterward, to get one more apple, he is willing to give up 20 more bananas so on and so forth. So, with every possible trade, the opportunity cost is declining and hence, it shows the case of decreasing opportunity cost.