Question

Part 2

Below is a production possibilities table for consumer goods (butter) and capital goods (guns).

Production Possibilities
Type of Production	Production Alternative A	Production Alternative B	Production Alternative C	Production Alternative D	Production Alternative E	Production Alternative F	Production Alternative G
Butter	0	1	2	3	4	5	6
Guns	14	13	11	9	7	4	0

Graph the data provided in the table using Excel. (Hints: Type your data into an Excel spreadsheet. With your mouse, highlight the data only. Go to insert. Click on scatter. Click on smooth lines chart. Select the line chart. Plot data drawing line.)

Based on the graph you created, determine if allocating advertising expenditures to boost sales or investing in a new plant and equipment would entail the greater opportunity cost. Explain and support your response.

Answer 1

Consider the following fig of “Production Possibility”, here we have measure “Gun” on the horizontal axis and “Butter” on the vertical axis.

So, here the “Production possibility” is down ward sloping and concave to the origin. Now, opportunity cost is the “benefits” from some alternative action that we will forgo by taking another action. So, here the opportunity cost of producing “Gun” is the reduction in the production of “Butter”, => the absolute slope of the production possibility. So, if we notice towards the “Production Possibility”, => we can see that initially when the production of “Gun” is less the absolute slope is also less now as the production of the capital good increases, => the absolute slope increases and the opportunity cost also increases.

So, the allocating advertising expenditure to boost sales or investing in new plant and equipment entail “lower” opportunity cost when “gun” is relatively less and “greater” opportunity cost when “gun” is relatively more.