Question

Problem 3 Production Possibilities Frontier - Alta

The country of Alta has 300 workers. Over the course of the workday each worker can either produce 5 yards of cloth or 10 pounds of wheat (individual workers can also divide their workdays and produce both goods over the course of a day).

(a) What is the opportunity cost of one yard of cloth?

(b) Draw the country’s production possibilities frontier with wheat on the vertical axis. Label the intersection points and the slope.

(c) Can it produce 465 yards of cloth 2,239 pounds of wheat?

Answer 1

(a)

One worker can produce either 5 yards of cloth or 10 pounds of wheat.

If all 300 workers are put into production of cloth then (300*5) 1,500 yards of cloth can be produced.

if all 300 workers are put into production of wheat then (300 * 10) 3,000 pounds of wheat can be produced.

The opportunity cost of one yard of cloth is (3,000/1,500) 2 pounds of wheat.

(b)

Following is the required labeled production possibilities frontier -

(c)

To produce one yard of cloth, economy has to sacrifice 2 pounds of wheat.

So, to produce 465 yards of cloth, economy has to sacrifice (465 * 2) 930 pounds of wheat.

Economy can produce a maximum of 3,000 pounds of wheat.

So, if it sacrifices production of 930 pounds of wheat, it can produce (3,000 - 930) 2,070 pounds of wheat.

This means that if economy produces 465 yards of cloth then it can produce 2,070 pounds of wheat.

Therefore it cannot produce 465 yards of cloth and 2,239 pounds of wheat.