Question

Production point Milk (gallons) Hats (number) 200 180 140 80 0 0 and and and and and 4

A small country produces only milk and hats and its production possibilities frontier is shown in the table above.

a.   The nation is currently producing at point B. What is the opportunity cost of producing two additional gallons of milk? At point C? At point D? What do your results show?

b.   Suppose the nation is initially producing 4 gallons of milk and 80 hats. What is the opportunity cost of producing 2 additional gallons of milk? Explain your answer.

thank you for helping.

Answer 1

a) If the nation is producing at point B they are producing 2 units of milk and 180 hats.If they increase the milk production by 2 more units the hat production will decrease by 40 units. So the opportunity cost at B is 40 hats. At C it is 60, and at D it is 80.

It shows as we go on increasing the production of the milk we have to sacrifice more and more hat in the production i.e. the diminishing marginal return of the milk.

b) The opportunity cost of producing two additional hat is zero. because when we are producing 4 gallons of milk and only 80 hats we are inefficient and can increase the hat producing without affecting the current milk output. We will continue the production at 80 hats.