Question

ECON 2303 HW I SP 20 A production possibilities table for bananas and apples is shown below. Type of Production Bananas (in pounds) Apples (in pounds) A 0 100 Production Alternatives B C D 20 40 60 75 50 25 E 80 0 a. Show these data graphically. Instructions: Use the tool provided PPC to draw a PPC curve (plot 5 points total). Apples (in pounds) 0 80 100 20 40 60 Bananas (in pounds) b. Does the economy above demonstrate the law of increasing opportunity cost C. Based on this information, what is the opportunity cost of a pound of apples? Click to select) What is the opportunity cost of a pound of bananas? Click to select)

Answer 1

(a)

Production Possibility Frontier Apples (in pounds) 0 10 20 30 60 70 80 90 40 50 Bananas (in punds)

(b) The economy above does not demonstrate the law of increasing opportunity cost. Since the production possibility frontier is linear, the opportunity cost of each unit of apples in terms of banana remains same at all levels. However, the law of increasing opportunity cost holds for a concave production possibility curve. Hence, the answer is NO.

(c) To produce 100 pounds of apples, 80 pounds of banana needs to be given up. So, for 1 pound of apple, 80/100 = 0.8 pounds of apple needs to be sacrificed. Hence, opportunity cost of a pound of apple = 0.8 pounds of apples.

To produce 80 pounds of bananas, 100 pounds of apples need to be sacrificed. So, for 1 pound of banana, 100/80 = 1.25 pounds of bananas need to be sacrificed. Hence, opportunity cost of a pound of bananas = 1.25 pounds of apples.