Question

Suppose Liam's Kitchen, a restaurant,: serves two items: hamburgers and french fries. With all employees working diligently, the restaurant can produce these combinations each hour.

Type of Product:   Production Alternatives

A B C D E

Burgers 0 10 20 30 60

Fry Bags 100 90 70 40 0

Calculate the opportunity costs of moving from one point to each of the others: Provide the answers after showing all work, and explain if theses costs are constant. What would it mean if the kitchen was actually making 35 Burgers and 45 Fries from Fry Bags? What would it mean if the kitchen was actually making 15 Burgers and 70 Fries from fry bags?

(Rubric: 12.5 points - 1) calculate the opportunity costs and show the work.; 2) Explain the 35-45 question; 3) Answer whether the opportunity costs are fixed or not; and 4) Explain the 15-75 question. 10 points - one of the two explanations is only a "word" not a sentence, and/or one of the points isn't identified. May not be some calculations. 8 points - Neither explanation is a complete sentence, and some of the points aren't identified. May not be many calculations. 6.25 points or less points - This is a failing score for the question. The answer is worse than that required for 8 points.)   

Answer 1

a) Opportunity costs is when consumer decides to produce a best option forgoing the next best alternative.

In this case, producing more burgers would mean giving up on fries from Fry bags and vice versa.

If the firm is moves from A to B ie from producing 0 burgers and 100 fries to 10 burgers and 90 fries. The opportunity cost of producing 10 burgers would be 10 fries. Hence opportunity cost of one burger is one fries.

If the kitchen moves from current level, to ppint C, it would be giving up 20 fries to obtain 10 more burgers and hence the opportunity cost of 1 burger would be 2 fries.

If it moves from C to D, the opportunity cost of 10 more burgers (from 20 to 30) would be 30 fries and opportunity cost of 1 burger would be 3 fries.

If the kitchen moves from D to E, the opportunity cost of 30 burgers (60-30) would be 40 fries ie one burger is 4/3 fries.

b) If the kitchen in producing 35 burgers and 45 Fry bags then the production point would be outside the curve. This is because at one point the level of production is 40 fry bags and 30 burgers and since the kitchen is producing more of both the goods, it is producing outside the PPF.

It is unattainable given the level of resources, unless there is a technological change or advancements.

c) If the firm is producing 15 burgers and 70 fries, it is inefficient. This is because this point would be somewhere inside the PPF and this would mean that the kitchen is not using its resources efficiently or there is wastage

( You can comment for doubts)