Question

Suppose that an economy produces only two types of products: machines and clothing. The table below shows the total production per week, assuming that production in both Product is based on the optimal use of resources. Required:

( Answers should be computerized )

1 - Draw and Plot the production potential of this economy, then calculate the cost of the opportunity for each distribution, what do you notice about the graph and the cost of the opportunity?

2- Can the economy produce (20) units of machinery and (150) units of clothing together? And why? What is the advantage of this distribution?

3-  Can the economy produce (40) unit machines, and (250) units of clothing together? And why?

The production potential of the two products is machinery, clothing and opportunity cost
Distribution	Machines	Clothes	Opportunity cost
A	0	300
B	40	180
C	60	120
D	100	0

Expert Answer

Answer 1

1.

Opportunity cost is the number of machines that must be given up to produce an additional unit of cloth.

	Machines	Clothes	Opportunity cost
Distribution
A	0	300
B	40	180	3
C	60	120	3
D	100	0	3

Opportunity cost of going from point A to point B = (300-180)/(40-0) = 120/40 = 3
Likewise it can be calculated for other points as well

What we notice is that the opportunity cost of producing an additional unit of machine stays constant across all combination. This is also reflected across all different production combinations.

For part 2 and 3, we refer to below diagram :

2. We notice that the point representing (20) units of machinery and (150) units of clothing together lies inside the PPF. Hence the economy can produce this combination. However, the economy won't be operating at its potential which lies on the PPF.

3. The (40) unit machines, and (250) units of clothing cannot be produced together since this combination lies outside the PPF. Hence, its not attainable given the resources of this economy.