Question

Part 1 Below is a production possibilities table for consumer goods (butter) and capital goods (guns).

Production Possibilities
Type of Production	Production Alternative A	Production Alternative B	Production Alternative C	Production Alternative D	Production Alternative E	Production Alternative F	Production Alternative G
Butter	0	1	2	3	4	5	6
Guns	14	13	11	9	7	4	0

Graph the data provided in the table using Excel. (Hints: Type your data into an Excel spreadsheet. With your mouse, highlight the data only. Go to insert. Click on scatter. Click on smooth lines chart. Select the line chart. Plot data drawing line.)

Based on the graph you created, complete the following:

o   Determine the cost of more butter, if the economy is at point C. What would be the cost of producing more guns? How does the shape of the production possibilities curve reflect the law of increasing opportunity costs?

Answer 1

If the economy is at C then The opportunity cost of 2 butter is 11 guns. So the opportunity cost of 1 butter is 11/2=5.5 guns. Cost of producing more butter is 5.5 guns.

1 Butter Guns Production Possibillity Frontire 14 14 12 10 ーSeries1 10 12 13 14 16 17 18 19 21 23 24 25 20

The opportunity cost of 11 guns is 2 butter. So the opportunity cost of 1 gun is 2/11 butter. Cost of producing more gun is 2/11 butter.

The shape of PPF is concave so if we move to the right we have to give up more guns for gaining butter. So concave shape reflects increasing opportunity cost.