Question

Suppose Nike opened a new production plant in China to produce sports clothes and shoes. After operating for several years, the company collected the following data about production possibilities (left table) and marginal benefit (middle table).

PPF		MB
Shoes (million pairs per year)	Clothes (million pieces per hour)	Shoes (million pairs per year)	Clothes (million pieces per year)
0	35
1	32	0.5	10
2	27	1.5	8.5
3	20	2.5	7
4	11	3.5	5.5
5	0	4.5	4

Question 4: Draw Nike’s production possibility frontier (PPF) and explain how your graph illustrates tradeoff/scarcity.

Question 5: What is Nike’s opportunity cost – in terms of million pieces of clothes) --- to produce the first, second, third, fourth, and fifth million pairs of Shoes?

Question 6: First, based on the opportunity cost data you just found, draw Nike’s Marginal Cost (MC) curve for Shoes, on a Shoe-Cloth diagram with Shoes on the horizontal axis. Next, find point (.5 , 3) on the MC curve, what is its economic meaning?

Question 7: First, draw Nike’s point on the Marginal Benefit (MB) curve for Shoes, again on a Shoe-Cloth diagram with Shoes on the horizontal axis. Next, find point (2.5, 7) on the MB curve, what is its economic meaning?

Question 8 (5 points): Based on the above information, what would be Nike’s optimal Shoe output? Explain the reasoning behind your answer.

Question 9 (5 points): Finally, what would be Nike’s optimal Clothes output? How did you find it?

Answer 1

Question 4.

Following is the Production Possibility Frontier (PPF) of Nike in China.

Tha graph is downward sloping. Which means, more of one commoodity can only be produced when the other commodity's prodcution is reduced, since resources are limited / scarce. Nike faces a trade-off in the production of clothes and the production of shoes.

Question 5.

Following table gives the opportunity cost of each additional million pairs of shoes. The last column shows how the opportunity cost has been derived.

Shoes	Clothes	Opportunity Cost	Derivation
0	35	-	-
1	32	3	(35-32)/(1-0)
2	27	5	(32-27)/(2-1)
3	19	7	(27-19)/(3-2)
4	11	9	(19-11)/(4-3)
5	0	11	(11-0)/(5-4)

This can be interpreted as - to produce the first million pair of shoes, Nike will have to let go producing 3 million pieces of clothes; to produce the second million par of shoes after the first pair has already been produced, Nike will have to let go producing 5 million pieces of clothes.

Question 6.

Marginal cost curve of Shoes can be seen in the following diagram. Here cost of producing shoes is measured in opportunity cost terms i.e. how much of clothes will have to be let go off, to produce a specific number of shoes.

Question 7.

Marginal benefit curve of Shoes can be seen in the following diagram. Here marginal benefit means how much utility will a particular level of quantity of shoes yield, where utility is measured in terms of quantity of clothes.

The point (2.5, 7) lies on the MB curve, and it shows the additional utility derived upon producing the 2.5 millionth pair of shoes is equivalent to 7 million pieces of clothes.

Question 8.

Nike's optimal shoe output will be where the MB and MC curves equate. We can superimpose both the curves on one graph.

Optimal Output is approximately equal to 2.75 million pairs of shoes.

Question 9.

Once we know the optimal shoe output, we can find out the optimal clothes output using the PPF from Question 6. So with 2.75 million pairs of shoes, Nike can produce somewhere between 22 and 23 million pieces of clothes.