Question

The data provided below describe an ice-cream store’s daily production possibilities for milkshakes and sundaes.

Milkshakes: 0 20 40 60 80 100 120

Sundaes: 210 200 180 150 110 60 0

(a) Draw a correctly labeled graph of the store’s production possibilities curve (PPC) with milkshakes on the horizontal axis and sundaes on the vertical axis and label the endpoints using the numbers provided above.

(b) Is the opportunity cost of producing milkshakes increasing, decreasing, or constant? Explain using numbers in the table.

(c) The store is currently producing 80 milkshakes and 110 sundaes. Calculate the opportunity cost of increasing milkshake production from 80 to 100 milkshakes. Show your work.

(d) Would it be efficient for the store to produce 80 milkshakes and 150 sundaes? Explain using numbers in the table.

(e) Suppose the ice-cream store purchases a new machine that increases the output of milkshakes and sundaes. Show the effect of the change on the store’s PPC on your graph in part (a).

Answer 1

(a)

Milkshakes	Sundaes
0	210
20	200
40	180
60	150
80	110
100	60
120	0

The curve 'PPC' is the production possibilities curve.

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(b) Increasing

Opprtunity cost of milkshakes = Number of sandaes sacrificed / Number of milkshakes gained or increased

Milkshakes	Sundaes	Opportunity cost of producing milkshakes
0	210	-
20	200	10 / 20 = 1/2
40	180	20 / 20 = 1
60	150	30 / 20 = 1.5
80	110	40 / 20 = 2
100	60	50 / 20 = 2.5
120	0	60 / 20 = 3

From the above table, we see that the opportunity cost of producing milkshakes is increasing.

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(c) 2.5 sundaes

The store is currently producing 80 milkshakes and 110 sundaes. To increase the production of milkshakes from 80 to 100, the production of sundaes must be decreased from 110 to 60 , i.e.,to increase the production of milshakes by 20 units(100 -80), the store should reduce the production of sundaes by 50 units (110 -60).

The increase of production of milkshakes by 20 units needs the decrease of production of sundaes by 50 units.

  The increase of production of milkshakes by 1 unit needs the decrease of production of sundaes by 50/20 = 2.5 units

The opportunity cost of increasing milkshake production from 80 to 100 milkshakes is 2.5 sundaes.

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(d) It is not efficient for the store to produce 80 milkshakes and 150 sundaes.

With the given resources and technology, if the store wants to produce 80 milkshakes, the maximum sundaes it can produce is 110. If the store wants to increase the production of sundaes by 1 unit, i.e., from 110 to 111, it must reduce the production of milkshakes because, the available resources are fixed. With 150 sundaes, the store can produce maximum 60 milkshakes.So, with the given resources, tt is not efficient for the store to produce 80 milkshakes and 150 sundaes.

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(e)

The purchase of new machine that increases the output of both milkshakes and sundaes will shift the production possibilities curve rightward. In the figure, we see that the production possibilities curve shifts from PPC1(old PPC) to PPC2(new PPC).

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