Question

Unit 2—Production Possibilities and Comparative Advantage

Production
Coffee	Tea	Tea with new technology
0	10
1	9
1.9	8
2.7	7
3.4	6
4	5
4.5	4
4.9	3
5.2	2
5.4	1
5.5	0

A farmer has 100 acres of land and has to choose between planting coffee trees and tea bushes. Some of the land is better for producing tea, some for coffee. The table shows the possible combinations (in tons) of coffee and tea that can be produced.

1. Plot the farmer’s PPF in the space above with tea on the horizontal axis.

2. Calculate the opportunity cost of producing the 3^rd ton of tea.

3. Calculate the opportunity cost of producing the 6th ton of tea.

4. Calculate the opportunity cost of producing the 10th ton of tea.

5. What is happening to the opportunity cost of producing additional tons of tea? Why?

6. Is it possible to produce 4 tons of coffee and 6 tons of tea? Why or why not?

7. Assume the farmer is currently producing 4 tons of coffee and 5 tons of tea. How much does it cost the farmer to double his tea production? (need this answer the most)

8. Suppose a new technology is developed that increases tea production by 50%. Fill out the table and update the PPF. (need this answer the most)

9. Is it now possible to produce 4 tons of coffee and 6 tons of tea? (need this answer the most)

Answer 1

1. The graph is as below.

2. The opportunity cost of producing 3rd ton of Tea (increasing Tea from 2 to 3) would be 0.3 (= 5.2 - 4.9) tons of Coffee. This means that one have to sacrifice 0.3 tons of Coffee for the that particular 1 (3rd) ton of Tea.

3. The opportunity cost of producing 6th ton of Tea (increasing Tea from 5 to 6) would be 0.6 (= 4 - 3.4) tons of Coffee. This means that one have to sacrifice 0.6 tons of Coffee for the that particular 1 (6th) ton of Tea.

4. The opportunity cost of producing 10th ton of Tea (increasing Tea from 10 to 9) would be 1 (= 1 - 0) tons of Coffee. This means that one have to sacrifice 1 tons of Coffee for the that particular 1 (10th) ton of Tea.

5. The OC of producing additional tons of Tea increases as the production of Tea increases. It is stated that some land is suited better for Coffee and some for Tea, and planting Tea increasingly on all the land, would include the land which is better suited for Coffee, and hence would take more resources to produce the additional tons of Coffee. In general, OC of a product increases as the production of that good increases, which is termed as the law of increasing opportunity cost.

6. It is not possible to produce 4 tons of Coffee with producing 6 tons of Tea, and vice versa, since 4 tons of C and 6 tons of T lies outside the PPF, which is an unattainable point. If one produces 6 tons of Tea, one can produce a maximum of 3.4 tons of Coffee, and if one produces 4 tons of Coffee, one can produce a maximum of 5 tons of Tea.

7. If the initial point of production is 5 tons of Tea, increasing the production to 10 tons of Tea (double of 5 tons of Tea) would decreas the production of Coffee from 4 tons to 0 tons. Hence, the cost of doubling of Tea production is 4 tons of Coffee.

8. The table would be as below.

Coffee	Tea	Tea with new Technology
0	10	15
1	9	13.5
1.9	8	12
2.7	7	10.5
3.4	6	9
4	5	7.5
4.5	4	6
4.9	3	4.5
5.2	2	3
5.4	1	1.5
5.5	0	0

The graph is as below.

9. It is indeed now possible to produce 4 tons of Coffee and 6 tons of Tea (actually now it is possible to produce more than 6 tons of Tea with 4 tons of Coffee, and vice versa). The point of production with 4 tons of Coffee and 6 tons of Tea is now inside the new PPF, and hence, producing this combination would actually leave some resources to produce some more Coffee and Tea. If one produces 4 tons of Coffee, one can produce now a maximum of 7.5 tons of Tea. If one produces 6 tons of Tea, one can produce now a maximum of 4.5 tons of Coffee. Hence, the stated production combination is now possible.