Question

Practice with Production Possibility Frontiers

Suppose you live on a deserted island and have decided that you will work 80 hours per week to make your island stay enjoyable. The chart below illustrates how many coconuts you could pick or fish you could catch in a week’s time.

Number of Coconuts	Number of Fish
0	7
10	6
19	5
27	4
34	3
40	2
45	1
49	0

A. Draw the production possibility frontier. Label the vertical axis “number of fish” and the horizontal axis “number of coconuts”.

B. Calculate the (marginal) opportunity cost of an increase in the number of coconuts from 10 to 19.

C. Is the opportunity cost the same for a movement from having 1 fish to 2 fish as it is for a movement from having 4 fish to 5 fish? Explain (Why does the result make sense?).

D. Think of four reasons (specific to this example) why the production possibility frontier might shift outward.

E. Why might the production possibility frontier for somebody else have a different shape and/or different vertical or horizontal intercept (where the curve hits the horizontal and vertical axes) than the one shown.

Answer 1

a) The following figure is production possibility frontier :

b)

For this question fish is taken as good 1 and coconut as good 2, moving from 10 coconuts to 19 there is gain of 9, but moving 6 fishes to 5 fishes there is sacrifice of 1 fish.

So,   

c)   When number of fish increased from 1 to 2, number of coconuts falls from 45 to 40 i.e. there is loss of 5 coconuts only. But movement from 4 fish to 5, number of coconuts decreases from 27 to 19 which results in loss of 8 coconuts. The opportunity cost of keep on increasing as more fish are being produced at the cost of coconut.

d) The possible reasons for production possibility frontier (PPF) to shifts outward:

I. Change in technology, in terms of better equipment for catching fish and taking coconut from tree can help increasing production of both goods which further shifts PPF to right.

II. Economic growth increases capacity of production, so whenever there is positive economic growth it lead to right ward shift in PPF.

III. When more labour is being employed to extract coconuts from tree and fishes from river simultaneously.

IV. Boost in number of coconuts due to natural factors and at the same time natural increase in fish production can help to have larger number of both goods, which shifts PPF out to the right.

e)            Production possibility frontier would have a different shape when marginal opportunity cost is either declining or is constant. Declining opportunity cost will result in convex PPF and constant opportunity cost result in downward sloping straight line PPF.