Question

Suppose Lost Island has an economy that only produces two products: guns and butter . These points below could be shown on a production possibilities curve— the represent all major combinations of these products that this society can produce.

Type of Product : Productions Alt

A B C D E

Guns 0 1. 2. 3. 4

Butter (1lb tub) 10 9. 7. 4. 0

1.What do you think Lost should produce at?

2. From this point, explain what the opportunity costs would be for the economy to move to the nearest points.

3. Are the opportunity costs fixed or not? Why not?

- Select a point

- identify the two nearest points

- Explain the opportunity costs

- Answer whether the opportunity costs are fixed or not

Answer why or why not in at least one complete sentence

Answer 1

1.Lost can see that it can produce more butter than guns. But this production should be based on what its consumers are demanding and which factors are in relative abundance and in intensity. It should choose any combination that lie on its PPF to achieve allocative efficiency and productive efficiency.

2. At A, G = 0 and B = 10. From A to B, G rises by 1 and B falls by 1. Hence a movement from A to B has an opportunity cost of 1 gun = 1 lb of butter. So we see that

• Movement from A to B has an opportunity cost of 1 gun = 1 lb of butter
• Movement from B to C has an opportunity cost of 1 gun = 2 lb of butter
• Movement from C to D has an opportunity cost of 1 gun = 3 lb of butter
• Movement from D to E has an opportunity cost of 1 gun = 4 lb of butter

3. We see that the opportunity cost for 1 unit of gun is increasing. This is perhaps because factors of production are not perfect substitutes and equally productive for guns and butter.