Question

The table below shows the possible production combinations of beer and sausage for Heapland

Possible Production Combinations	Bourbon (barrels)	Computers
A	70	0
B	60	20
C	50	36
D	40	48
E	30	56
F	20	60
G	10	63
H	0	65

a(1). Suppose current productionis at point D. What is the opportunity cost of producing 10 more barrels of bourbon?Provide a clear explanation in the box below.

d(2). Suppose that the citizens of Heapland have yet to discover the joys of bourbon, so they only produce computers, point H. What happens to the opportunity cost of producing more and more bourbon? Why? Provide a clear explanation in the box below.

c(2). Which is the “best” production point? Why is that point “best”? If you do not think there is a “best” point, why? Provide a clear explanation in the box below.

Answer 1

Based on the table, the following observations are made:

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a(1). Suppose current production is at point D. What is the opportunity cost of producing 10 more barrels of bourbon? Provide a clear explanation in the box below.

At point D, the country is producing 40 barrels of bourbon and 48 computers.

Now, if it moves to point C, it produces 50 barrels of bourbon and 36 computers.

Thus, it has given up 12 computers (48 - 36) to produce 10 barrels of bourbon.

The opportunity cost of 10 barrels of bourbon is 12 computers.

Opportunity cost is the value of the next best alternative, or the foregone option.

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d(2). Suppose that the citizens of Heapland have yet to discover the joys of bourbon, so they only produce computers, point H. What happens to the opportunity cost of producing more and more bourbon? Why? Provide a clear explanation in the box below.

Starting from point H, and producing more and more bourbon, the country moves to points G, F, E, D, C, B and A, respectively.

At point H, zero bourbon is produced. At point A, zero computers are produced.

As the country moves from point H to point A, the opportunity cost (measured in terms of computers) begins to rise at an increasing rate.

The opportunity cost moves from 2, 3, 4, 8, 12, 16 and 20, from point H to A.

This is happening because resources need to be allocated from computers to bourbon. These resources are scarcely available. Some of them were more suited for the production of computers.

The country had to balance between the two goods, but as it produces more of one good, it also gives up more of the second good. It is up to the country and its consumers to decide how much of each good they would like.

Computers are a technologically advanced good, and thus the requirement of resources is specialized.

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c(2). Which is the “best” production point? Why is that point “best”? If you do not think there is a “best” point, why? Provide a clear explanation in the box below.

On a PPF, all the points are technologically feasible.

Each point on the PPF is "best", because it represents the efficient outcome for the country. The PPF doesn't talk about preferences, but only production technologies.

The best point also depends on consumers' preferences for that country, for which consumer analysis is required.

From the perspective of only the producers, and the technology they use, every point on the PPF represents an optimal point.