Question

The nation of Leisureland can produce two goods, bicycles and bowling balls. The western region of Leisureland can, if it devotes all its resources to bicycle production, produce 100 bicycles per month. Alternatively, it could devote all its resources to bowling balls and produce 400 per month—or it could produce any combination of bicycles and bowling balls lying on a straight line between these two extremes. The eastern region of Leisureland can, if it devotes all its resources to bicycle production, produce 400 bicycles per month. Alternatively, it could devote all its resources to bowling balls and produce 100 per month—or it could produce any combination of bicycles and bowling balls lying on a straight line between these two extremes. Respond to the following questions (you may want to construct a graph in order to help with your answers – you are not required to present a graph):

a) What it is the opportunity cost of producing an additional bowling ball measured in terms of forgone bicycles in western Leisureland?

b) What is the opportunity cost of producing an additional bowling ball measured in terms of forgone bicycles in eastern Leisureland?

c) Explain the difference in opportunity cost between western and eastern Leisureland. Which region has a comparative advantage in producing bowling balls? Bicycles?

d) Suppose it is determined that 400 bicycles must be produced. How many bowling balls can be produced?

e) Where will these goods be produced?

Answer 1

a) In western leisureland, the opportunity cost of producing an additional bowling ball is 1/4 bicycle. The opportunity cost of 400 balls is 100 bicycles. Hence the opportunity cost of one ball is 1/4 bicycle.

b) In the eastern leisureland, the opportunity cost of producing 100 balls ia 400 bicycles. So the opportunity cost of producing one additional ball is 4 bicycles.

c) The opportunity cost of producing bicycles is higher in the western leisureland than in the eastern leisureland. The opportunity cost of producing bowling balls is higher in the eastern leisureland than in the western leisureland. The western region has a comparative advantage in producing bowling balls. The eastern region has a comparative advantage in producing bicycles.

d) If it is determined that 400 bicycles must be produced, 400 bowling balls can be produced. The western region will devote all its resources to balls and the eastern region will devote all its resources to bicycles.