Question

Suppose a farmer has several plots of land on which he can grow wheat or corn. The following table lists his options for production:

Option	Wheat	Corn
A	100	0
B	80	35
C	60	65
D	40	85
E	20	105
F	0	110

a) Construct a graph of the farmer’s PPF with corn on the Y-axis and wheat on the X-axis. Plot points A through F on the PPF.

b) What is the opportunity cost of an additional wheat unit from point E to point D?

c) Suppose that due to a technological change in corn (perhaps a better yielding seed corn), the output of corn increases by 20% for every fixed level of wheat. Create a new table showing the data for points A through F after the technology change.

d) Draw PPF1 on your graph to show the effect of the technology change.

e) Has the opportunity cost of wheat increased or decreased as a result of the technology change in corn? Has the opportunity cost of corn increased or decreased?

f) Prove your answer by calculating the new opportunity cost of an additional wheat unit from point E to D.

Answer 1

(a) The graph is as below.

100- PPF 50 00

(b) From point E to D, to increase the wheat by 20 units, the corn should be reduced by 20 units, ie to increase wheat by 1 units, the corn should be reduced by 20/20=1 units.

Hence, the OC of wheat from E to D is 1 units (corns).

(c) The table would be as below. For if previous production was X units of corn, the new production would be (1+0.2)X or 1.2X units of corn.

Option	Wheat	Corn
A	100	0
B	80	42
C	60	78
D	40	102
E	20	126
F	0	132

(d) The graph is as below.

PPF1 100 PPF 50+ 100

(e) The OC of wheat would increase, since the new PPF is steeper than before, ie change in corn per unit increase in wheat have increased.

The OC of corn would decrease, as it should be since it would be just the opposite of OC of wheat. It can be considered that, taking corn on horizontal axis, the PPF have become steeper (flipping the given PPF), and this means that the change in wheat per unit increase in corn have decreased.

(f) From point E to D, to increase the wheat by 20 units, the corn should be reduced by 24 units, ie to increase wheat by 1 units, the corn should be reduced by 24/20=1.2 units.

As can be found, the OC of wheat from E to D is 1.2 units (corns), which verifies with what is stated.