Question

5. Opportunity cost and production possibilities

Eric is a skilled toy maker who is able to produce both cars and drums. He has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of his time.

Choice	Hours Producing		Produced
	(Cars)	(Drums)	(Cars)	(Drums)
A	8	0	4	0
B	6	2	3	10
C	4	4	2	16
D	2	6	1	19
E	0	8	0	20

On the following graph, use the blue points (circle symbol) to plot Eric's initial production possibilities frontier (PPF).

Initial PPFNew PPF012345678302520151050DRUMSCARS

Suppose Eric is currently using combination D, producing one car per day. His opportunity cost of producing a second car per day is   per day.

Now, suppose Eric is currently using combination C, producing two cars per day. His opportunity cost of producing a third car per day is   per day.

From the previous analysis, you can determine that as Eric increases his production of cars, his opportunity cost of producing one more car   .

Suppose Eric buys a new tool that enables him to produce twice as many cars per hour as before, but it doesn't affect his ability to produce drums. Use the green points (triangle symbol) to plot his new PPF on the previous graph.

Because he can now make more cars per hour, Eric's opportunity cost of producing drums is   it was previously.

Answer 1

	Initial PPF
	Cars	Drums
A	4	0
B	3	10
C	2	16
D	1	19
E	0	20

	New PPF
	Cars	Drums
A	8	0
B	6	10
C	4	16
D	2	19
E	0	20

Suppose Eric is currently using combination D, producing one car per day. His opportunity cost of producing a second car per day is 3 (19-16) drums per day.

Now, suppose Eric is currently using combination C, producing two cars per day. His opportunity cost of producing a third car per day is 6 (16-10) drums  per day.

From the previous analysis, you can determine that as Eric increases his production of cars, his opportunity cost of producing one more car increases .

Suppose Eric buys a new tool that enables him to produce twice as many cars per hour as before, but it doesn't affect his ability to produce drums. Use the green points (triangle symbol) to plot his new PPF on the previous graph.

(Refer above graph)

Because he can now make more cars per hour, Eric's opportunity cost of producing drums is twice/higher as previously.