Question

Dude Solutions employs four workers. Judy is capable of knitting 20 scarfs or 5 sweaters. Carlos can knit 8 scarfs or 8 sweaters. Mary can knit 4 scarfs or 16 sweaters. Bob can knit 40 scarfs or 20 sweaters.

1. Graph the production possibilities frontier for Dude Solutions. Place scarfs (R) on the vertical axis and sweaters (T) on the horizontal axis.
2. What is the opportunity cost of producing the first 20 sweaters? Show calculations.
3. What is the opportunity cost of producing the 37th scarf? Show calculations.
4. Suppose that Dude Solutions is currently producing 60 scarfs and 16 sweaters. What is the opportunity cost of expanding scarf production by 8 units? Explain.

Answer 1

A

B)judy OP of producing one sweater=20/5=4

Carlos OP of producing one sweater =8/8=1

Mary OP of producing one sweater=4/16=1/4=0.25

Boby OP of producing one sweater=40/20=2

The lower OP person will produce sweater first than the high OP person .

So mary has lowest OP ,so he will produce 16 sweater. So OP of 16 sweater =16*0.5=8

Carlos have next lowest OP ,so he will produce 4 sweater and OP =4*1=4

Producing first year 20 sweater =8+4=12

C)judy OP of producing one scarf=5/20=0.25

Carlos OP of producing one scarf=8/8=1

Mary OP of producing one scarf=16/4=4

Bob OP of producing one scarf=20/40=0.5

First 20 scarf produced by judy at OP =0.25*20=5

Next 17 scarf produced by bob bob at OP=17*0.5=8.5

OP of 37 producing 37 scarf=5+8.5=13.5

D)60 scarf means 20 of judy + 40 of bob. But dude solution can produce at same time 24 sweater (16 of mary and 8 of carlos). It means carlos is currently doing nothing.

So expanding scarf production by 8 units have zero opportunity cost as carlos will produce next 8 units of scarfs .it dude solution is currently under ppf curve.