Question

This is for Macro-Econ: I just need to double check my answers on item d. and item e.

1. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds?

When increasing the annual output of potatoes from 600 to 800 pounds the country has to lose 200 pounds of fish because 500 pounds of fish – 300 pounds = 200 pounds. Therefore, 200 potatoes = 200 fish. The opportunity cost of potatoes with respect to fish is 200/200. So, opportunity cost of potato = 1 fish.

2. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds?

When the output increases from 200 to 400 pounds of potatoes there is an increase of 200 pounds of potatoes and the country must sacrifice 50 units of fish (650-600=50). If the production of potatoes is to increase, then the production of fish should be decreased by 50 pounds.

c. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds?

d. Can you explain why the answer to parts b and c are not the same?

e. What does this imply about the slope of production possibility frontier?

Answer 1

Generally a PPF is concave in shape

D) so concavity imply the rising Opportunity cost of production of a good, when we produce more of it

Thus one has to give up increasing amount of one product, when the other product has increased.

So in b) when potatoes are increased from 200 to 400, then 50 fishes has to be given up.

Thus opportunity cost of production of potato = 50/200 = .25 fish

Now in a) as potato Production rise from 200 to 400,

Then Opportunity cost of production is 1 fish

thus Opportunity cost of production of potato ( in terms of fish) rise ,as potato Production increase continuously

thus the reason is diminishing marginal returns to production.

as potato Production rises , then more resources are diverted for potato Production & so fish Production falls.

Thus MC of production of potato rises, so increasing amount of fish has to be given up for additional potato unit.

E) from part d explanation,as slope of ppf is MRTS ( Opportunity cost of production), so modulus of Slope of PPF rises continuously