Question

Table 1-1

Possible Output Combinations	Apples (thousands of kilos)	Pears (thousands of kilos)
A	70	0
B	60	20
C	50	36
D	40	48
E	30	56
F	20	60
G	10	63
H	0	65

2.       Refer to Table 1-1. The Fruit Farm produces only apples and pears. The table aboveshows the maximum possible output combinations of the two fruits using all resources and currently available technology.

a.       Graph the Fruit Farm's production possibilities frontier. Put apples on the horizontal axis and pears on the vertical axis. Be sure to identify the output combination points on your diagram.

b.       Suppose the Fruit Farm is currently producing at point D. What is the opportunity cost of producing an additional 8,000 kilos of pears?

c.       Suppose the Fruit Farm is currently producing at point D. What happens to the opportunity cost of producing more and more pears? Does it increase, decrease or remain constant? Explain your answer.

d.       Suppose the Fruit Farm is currently producing at point G. What happens to the opportunity cost of producing more and more apples? Does it increase, decrease or remain constant? Explain your answer.

e.       Suppose the Fruit Farm is plagued by a maggot infestation which destroys apple trees but not pears. Show in a graph what happens to its PPF.

Answer 1

(c). If fruit farm is currently producing at point D, then the opportunity cost of producing more and more pears is constant. Because at point D, pears production is 48,000 kilos and apple production is 40,000 kilos. If more pears is produced i.e if it moves from point D to point E, then for extra 8000 of pears it sacrifices 10,000 kilos of apples. More clearly from point D to E, for 1 extra pears it sacrifices 10000/8000 = 1.25 apples. Again from point E to point F, there extra pears is 60000 - 56000 = 4000. At this point apple sacrifice is 30000 - 20000 = 10,000. So for extra 4000 pears there sacrifice of apple as 10,000. For extra 1 pears sacrifice of apple is 10000/4000 = 2.5 apples. Again from point F to G the sacrifice of apple for 1 extra pears is 10000/3000 = 3.33 apples. So it is increasing in terms of apple sacrifice for more and more pears production.

(d). If fruit farm is currently producing at point G, then if it produce more and more apples then it moves from point G to F, then F to E, E to D and so on..Now if it moves from point G to F, then it produces 10,000 more apples and for that it sacrifices 3000 pears. So we can say for 1 extra apple it sacrifices 3000/10000 = 3/10 = 0.3 pears. Again from point F to E for extra 10000 apples it sacrifices 4000 pears. For 1 extra apple it sacrifices 4000/10000 = 0.4 pears. Again from E to D, for extra 10,000 apples it sacrifices 8000 pears. So for 1 extra apple it sacrifices 8000/10000 = 0.8 pears. Therefore for extra 1 apple apple production opportunity cost of pears is increasing 0.3 to 0.4 to 0.8. Therefore opportunity cost of extra apple production is increasing.

e. If fruit farm is plagued by a maggot infestation and if it destroys apple trees then apple production will fall. So PPF touching point at horizontal axis will shift left. Maximum point of possible apple production will fall. Though the pears production will not change. PPF at horizontal axis will touch at left side depend on how much apple is able to produce. It will touch below or left of 70,000 kilos of apples.