Question

Suppose there is a small agrarian economy that has four plots of land. Plot 1 is right next to the river, then plot 2, etc with plot 4 being far away from the river. Suppose the growth rate of corn does not depend on moisture, so each plot of land can grow 100 tons of corn. However avocados love wet soil, so plot 1 can grow the most (400 avocados) and plot 4 can grow the least (100 avocados) and plot 2 and 3 can grow 300 and 200 respectfully. Each plot can grow only corn OR avocado, not both.

Fill in the blanks of the following table representing the economy's PPF, showing the combinations of corn and avocados this economy can produce.

Point	Avocados	Corn
A	0
B		300
C
D		100
E	1000

Suppose the economy starts off producing only Avocado (point E). If they decide to start making corn as well, what is the opportunity cost of the first 100 units of corn?    

  

Suppose they keep deciding to produce more and more corn. At that last plot of land where they go from combination B to A, what is the opportunity cost of that last 100 units of corn produced?    

  

Given your answers above, it would suggest that this economy is experencing --------   opportunity cost when it comes to the production of corn.

Answer 1

The production possibility frontier is the locus of all combinations of goods and services produced by an economy using all its resources efficiently. In this case, if the economy produces only corn, the total corn production would be 400. Then it started growing avocado. It will start from the most productive field or plot1. Then the total avocado produced in plot 1 is 400 and the total production of corn in the rest of the 3 plots is 300. Again the production of avocado increases from 1 plot to 2 plot, total avocado produced now rises to (400+300)=700. Total cor production reduced to 200. Continuing this way, next avocado production would rise to (400+300+200)=900 and corn reduces to 100. The final avocado production with 4 plots growing the only avocado is 1000 and corn production reduces to 0.

The PPF table is given as

Point	Avocados	Corn
A	0	400
B	400	300
C	700	200
D	900	100
E	1000	0

The opportunity cost is the cost of foregoing the next best alternative. Like to produce corn the economy has to give up producing avocado on the same plot. Then opportunity cost of producing corn is avocado. If the economy was at E and start growing corn, from E to D corn production rises from 0 to 100 and Avocado production falls from 1000 to 900. Therefore, the opportunity cost of 100 corn is (1000-900)=100 avocadoes.

From B to A, the avocado production falls from 400 to 0 to produce 100 more corn. Then the opportunity cost of the last 100 corn is 400 avocadoes.

Therefore, the opportunity cost rises from the first 100 corn to the last 100 corn. Hence, the economy is experiencing an increasing opportunity cost of production.