Question

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

Table showing production level trade off:

Region	Bicycles	Bowling Balls
Western Leisureland	100	400
Eastern Leisureland	400	100

a) Western Leisureland's opportunity cost of bowling balls in terms of bicycles = Bicycles produced if all resources are used in bicycles/ Bowling balls produced when all resources used for bowling balls.

100/ 400 = 0.25.

Therefore, opportunity cost = 0.25

b) Opportunity Cost of additional bowling balls in terms of Bicycles forgone in eastern region = Bicycles produced if all resources are used in bicycles/ Bowling balls produced when all resources used for bowling balls.

= 400 / 100 = 4.

Therefore , opportunity cost for eastern region = 4.

c) Opportunity cost table for differences in opportunity cost -:

Region	Opportunity cost of Bicycles	Opportunity cost of bowling balls
Western	400/100 = 4	100/400 = 0.25
Eastern	100/400 = 0.25	400/100 = 4

• Western Region has higher opportunity cost of producing bicycles and lower opportunity cost for producing bowling balls.
• Eastern Region has high opportunity cost of producing bowling balls and lower opportunity cost in bicycles.
• Western Region has Comparitive advantage in producing BOWLING BALLS.(due to low opportunity cost)
• Eastern Region has Comparitive advantage in producing BICYCLES.(due to low opportunity cost)

d) If it is determined that 400 bicycles are to be produced then 400 bowling balls can be produced. ( as these are the maximum combinations that can be produced)

e) Bicycles will be produced in Eastern Leisureland . [Because eastern region will specialise in bicycles due to lower opportunity cost]

Bowling Balls will be produced in Western Leisureland . [ Because western region will specialise in bowling balls due to lower opportunity cost]