Question

5. Opportunity cost and production possibilities

Andrew is a skilled toymaker who is able to produce both cars and kites. He has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of his time.

Choice	Hours Producing		Produced
	(Cars)	(Kites)	(Cars)	(Kites)
A	8	0	4	0
B	6	2	3	12
C	4	4	2	17
D	2	6	1	19
E	0	8	0	20

Suppose Andrew is currently using combination D, producing one car per day. His opportunity cost of producing a second car per day is (1, 2, 17, or 19 kites) per day.

Now, suppose Andrew is currently using combination C, producing two cars per day. His opportunity cost of producing a third car per day is (1, 5, 12, or 19 kites) per day.

From the previous analysis, you can determine that as Andrew increases his production of cars, his opportunity cost of producing one more car (decreases, increases or becomes constant) .

Suppose Andrew buys a new tool that enables him to produce twice as many cars per hour as before, but it doesn't affect his ability to produce kites. Use the green points (triangle symbol) to plot his new PPF on the previous graph.

Because he can now make more cars per hour, Andrew's opportunity cost of producing kites is (higher than, lower than, the same as) it was previously.

Answer 1

	Produced (Old Technology)		Opportunity Cost of producing
Choice	Cars	Kites	Car (Kites/1 Car)	Kites(Cars/1 Kite)
A	4	0	12
B	3	12	5	0.08
C	2	17	2	0.20
D	1	19	1	0.50
E	0	20		1.00

Suppose Andrew is currently at combination D and he moves to combination C

Opportunity Cost of producing second car per day=(19-17)=2 kites per day

Suppose Andrew moves from combination C to combination B

Opportunity Cost of producing third car per day=(17-12)=5 kites pre day

We can observe that as production of cars is increased, opportunity cost of producing car increases

	Produced (New Technology)		Opportunity Cost of producing
Choice	Cars	Kites	Car	Kites
A	8	0	12
B	6	12	5	0.17
C	4	17	2	0.40
D	2	19	1	1.00
E	0	20		2.00

We can see in the above tables that opportunity cost of producing kites is higher than the initial situation