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

Q4 Ans. If Nike decides to produce 3 million shoes then it will only be able to produce 20 million pieces of clothes which means Nike's opportunity cost to produce 3 million shoes will be 15 million clothes.

If it decides to produce 5 million pairs of shoes then it will have to give up the production of clothes that is the opportunity cost of 5 million shoes will be 35 million pieces of clothes.

It's totally means that to increase the production of one product the company has to give up the production of the product.

Q5. The opportunity cost for 90 to produce 1 million shoes will be 3 million pieces of clothes which means the company has to give up 3 million pieces of clothes(35m to 32m) to produce 1 million pair of shoes.

Secondly, to produce 2 million pair of shoes Nike has to give up 8 million pieces of clothes(35m to 27m).

Thirdly, to produce 3 million pairs of shoes Nike will have to give up 15 million pieces of clothes(35m to 20m).

Fourthly, to produce 4 million pairs of shoes Nike opportunity cost will be 24 million pieces of clothes(35m to 11m).

Lastly, to produce 5 million pair of shoes 90s opportunity cost will be 35 million pieces of clothes (35m to 0m).

Giving up of anything to produce another thing is the opportunity cost for the company.

Q6. Q7. Ans.