Question

Soybean (bushels per year)		Chicken (pounds per year)
500	and	0
400	and	300
200	and	500
0	and	550

Use the table, which shows a farm’s production possibilities, to work Problems 2 and 3.

2. If the farm uses its resources efficiently, what is the opportunity cost of an increase in chicken production from 300 pounds to 500 pounds a year? Explain your answer.

3. If the farm adopted a new technology, which allows it to use fewer resources to fatten chickens, explain how the farm’s production possibilities will change. Explain how the opportunity cost of producing a bushel of soybean will be affected.

4. "Because the United States is the largest economy in the world and can produce anything it needs domestically, there are no gains from trade for the United States." Is the previous statement correct or incorrect?

5. The United States can use all of its resources to produce 50 computers or 4,000 shoes. Suppose

that at world market prices, one computer exchanges for 100 shoes. Explain how the United States can gain from trade

.

Answer 1

2. Opportunity cost of producing a unit is the reduction in the quantity produced of the other good. Here the opportunity cost of an increase in chicken production from 300 pounds to 500 pounds a year is the resultant loss in the production of soybean which is (400 - 200) = 200 bushels per year.

3. If the farm adopted a new technology, which allows it to use fewer resources to fatten chickens, it will be able to produce more chickens while the production of soybeans would remain same. Since this more chickens are produced for each unit of soybean lost, the opportunity cost of producing soybeans would fall as the production possibilities curve shifts out from the chicken side.

4. This is incorrect because there several goods and services which are produced by the economy at a higher relative opportunity cost of production in comparison to other nations. This puts the nation at comparative advantage in some goods and comparative disadvantage in some other goods.

5. The United States can use all of its resources to produce 50 computers or 4,000 shoes. The opportunity cost of 1 computer is thus 4000/50 = 80 shoes. Since at world market prices, one computer exchanges for 100 shoes United States can gain from trade by producing only computers at an opportunity cost of 80 shoes per computer and earning 100 shoes in return, thereby gaining from trade.