Question

5. Opportunity cost and production possibilities Shen is a skilled toy maker who is able to produce both boats 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. Choice Hours Producing (Boats) (Puzzles) Produced (Boats) (Puzzles) On the following graph, use the blue points (circle symbol) to plot Shen's initial production possibilities frontier (PPF). Suppose Shen is currently using combination D, producing one boat per day. His opportunity cost of producing a second boat per day is per day. Now, suppose Shen is currently using combination C, producing two boats per day. His opportunity cost of producing a third boat per day is per day. From the previous analysis, you can determine that as Shen increases his production of boats, his opportunity cost of producing one more boat Suppose Shen buys a new tool that enables him to produce twice as many boats 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 he can now make more boats per hour, Shen's opportunity cost of producing puzzles is it was previously.

Answer 1

Puzzles -Initial PPF New PPF 5 Boats

Combination D:

Opportunity cost of producing second boat per day = 15 - 13 = 2 puzzles / day (the production of puzzles given up)

Combination C:

Opportunity cost of producing third boat per day =13 - 8 = 5 puzzles / day

As Shen increases his production of boats, his opportunity cost of producing one more boat increases.

Because he can now make more boats per hour, Shen's opportunity cost of producing puzzles is more than it was previously.