Question

a) Draw a production possibility frontier for blue jeans and computers that illustrates the law of increasing opportunity cost. b) Clearly explain how you know that your graph follows the law of increasing opportunity cost. c) Suppose a new technology for producing blue jeans is developed that allows more blue jeans to be produced with the same amount of resources as before. Show this change on your diagram. Explain what happens to the opportunity cost of producing computers and why

Answer 1

A) PPF

B) shape of PPF is concave

Thus slope is decreasing at a decreasing rate,

As absolute value of slope is the rate at which computers are given to consume extra unit of blue jeans,

From figure it's clear that this absolute slope, shown by blank lines, is increasing , as we move down along PPF,

So more & more number of computers are given up, to produce additional unit of jeans, thus opportunity cost of producting blue jeans is continuously increasing.

C,)

Now PPF rotates to right, thus biased rotation towards blue jeans.

Now opportunity cost falls, as PPF becomes flatter