Question

2. The graph below represents our choices between the production of food and biofuels as discussed in the news article "Fuel v. Food" (Files-News Articles-Basic Econ Concepts). 20 18 16 n 14 E 12 10 4.5 Q biofuel (thousands of gallons) a. Compute below and show on the graph the opportunity cost of increasing biofuel production from 1 to 2 thousand gallons? (2) b. How does the opportunity cost of increasing biofuel production from 0 to 1.5 thousand gallons compare to that of increasing it from 2 to 3 thousand gallons? Why do they differ? Explain. (4)

Answer 1

a) The opportunity cost is the slope of the PPF. Slope is measured as ∆Y/∆X where Y is a variable measured on vertical axis and X is a variable measured on horizontal axis. Here when there is amovement from A to B, when biofuel is increased from 1000 gallons to 2000 gallons, the opportunity cost is the reduction in the production of food which is 4 tons of food. Hence the opportunity cost is 4 tons of food

b) The opportunity cost of increasing biofuel production from 0 to 1.5 thousand gallons is 4 tons of food from 20 tons to 16 tons. The opportunity cost of increasing biofuel production from 2 to 3 thousand gallons is 6 tons of food from 14 tons to 8 tons. The opportunity cost is increasing as more and more biofuel is produced. This is because the resources that were previously producing food are now being withdrawn and put in the production of biofuel. This resource allocation increases the opportunity cost. The resources are not equally substitutable for both the goods and so their efficiency is different for wheat and biofuel. This is the reason for an increasing slope or opportunity cost

20 18 AFood 16 n 14 in 12 O 10 Opportunity cost of 100 gallon of fuel from A to B is 4 tons of food. 4.5 Q biofuel (thousands of gallons)