Question

An island castaway spends eight hours each day acquiring two items--coconuts and fish--based on the following production possibilities schedule. Coconuts Fish Production Scenario A B C D 24 20 12 0 O 1 2 3 Calculate the opportunity costs for the different production scenarios. Explain the shape of the PPF. What happens to the PPF if total time available increases to 12 hours?

Answer 1

The opportunity cost of moving from A to B is given as:

(20-24) ÷ (1-0) = -4

From B to C, opportunity cost is (12-20) ÷ (2-1) = -8

From C to D, opportunity cost is given as:

(0-12) ÷ (3-2) = -12

Thus, the opportunity cost keeps on rising as we move along the PPF. This suggests that the shape of PPF is concave. This means that inorder to produce more of one good, the economy needs to give up more and more of the other good.

Also, the negative sign suggests the downward sloping PPF. This signifies trade off between the two commodities.

If the total time increases, this will shift the production function to the right implying that with more time, we can produce more and more of both the goods.