Question

Question 1

(a) Opportunity cost in economics is highly relevant and significantly affect households,

      firms, and the government. Explain by means of an example.

                                                                                                                                [4 marks]

(b) Illustrate scarcity and trade-off by means of a production possibilities frontier (PPF).

                                                                                                                                [6 marks]

Answer 1

a) Opportunity cost is the loss of value of one alternative when other is chosen. As resources are scrace and income is limited, everyone face concept of opportunity cost.

When household spend 4 hours watching movie in theatre, there opportunity cost if the time lost to play with their kids.

Opportunity cost for firm owner is foregone monthly salary from the job which she could have joined if not operating this firm.

Government will left with less money if they spend more money on infrastructure. Thus, opportunity cost is the overall growth of all other sectors.

b) Scarcity says that we have limited resources to produce a good therebaly we have to trade off such that we come out with maximum output produced. We can see from the graph below that to raise little amount of good X production, we have to forego huge amount of good Y production. From the graph below, fall in A leads rise in C while fall in B leads to rise in D where the gap of fall A and B is same which raise the amount of good X by diminishing amount.