Question

Consider the following production possibilities schedule for two goods- Tshirts and running shoes:

Running shoes (per month)

Tshirts (per month)

0	10000
500	9000
1000	7000
1500	4000
2000	0

A) Suppose that this economy is currently producing 1000 running shoes per month (on its ppf). At this allocation what is the opportunity cost of producing 2000 more tshirts. Show the calculaitons

B) What are some differences between a PPF that is curved outward and one that is a straight line? Explain.

Answer 1

A) 1/4 running shoes per month.

Running Shoes(per month)	Tshirts(per month)	Opportunity Cost of Producing Tshirts
0	10000	500/1000 = 1/2
500	9000	500/ 2000 = 1/4
1000	7000	500/3000 = 1/6
1500	4000	500/4000 = 1/8
2000	0	-

The economy is currently producing 1000 running shoes per month on its ppf. With this 1000 running shoes per month, the economy is producing 7000 tshirts. Now, if the economy wants to produce 2000 more tshirts, it must sacrifice the production of some running shoes. After increasing 2000 more tshirts, the economy is producing 9000 Tshirts. With this 9000 tshirts, the economy is producing 500 running shoes per month.

Let us now see the opportunity cost of producing 2000 more tshirts per month;

For producing 2000 more tshirts per month, the economy is sacrificing 1000 - 500, i.e., 500 running shoes per month

For producing 1 more tshirt per month, the economy is sacrificing 500 / 2000 = 1/4 running shoes per month.

So, the opportunity cost of producing 2000 more tshirts is 1/4 running shoes per month.

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B) The PPF that is curved outward implies an increasing opportunity cost of production along the PPF. When the resources in the economy are limited, and the specialization of resources in production is different among the goods, we observe that to increase the production of one good, more and more of the other good need to be sacrificed to release more resources from that sector. As a result the opportunity cost of production rises.

In case of straight line PPF, the opportunity cost of production is constant along the PPF. In this case the same amount of one good is sacrificed to increase the production of another good. This happens because the resources are equally specialized in the production of all commodities.

PPF that is curved outward	Straight line PPF
Increasing opportunity cost of production along the PPF.	Constant opportunity cost of production along the PPF.
Specialization of resources in production is different among the goods.	Resources are equally specialized in the production of all commodities.

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