Understanding Marginal Opportunity Cost on a Production Possibilities Frontier

Q33. If the economy is currently producing at point A, what is the marginal opportunity cost of moving to point B?

Background

Topic: Production Possibilities Frontier (PPF) and Opportunity Cost

This question tests your understanding of how to calculate the marginal opportunity cost when moving between points on a PPF. The PPF shows the maximum possible output combinations of two goods that can be produced given available resources and technology.

Key Terms and Formulas

• Marginal Opportunity Cost: The amount of one good that must be given up to produce an additional unit of another good.

• Production Possibilities Frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources.

• Formula:

$\text{Marginal Opportunity Cost} = \frac{\text{Change in Good A}}{\text{Change in Good B}}$

Step-by-Step Guidance

1. Identify the coordinates for points A and B on the PPF. For example, point A might represent (22, 35) and point B (30, 29), where the first value is wrenches (thousands) and the second is hammers (thousands).

2. Calculate the change in the number of wrenches produced when moving from A to B: $\text{Change in Wrenches} = 30 - 22$.

3. Calculate the change in the number of hammers produced when moving from A to B: $\text{Change in Hammers} = 29 - 35$.

4. Since producing more wrenches means producing fewer hammers, the opportunity cost is the decrease in hammers per increase in wrenches.

5. Set up the marginal opportunity cost formula: $\text{Marginal Opportunity Cost} = \frac{\text{Change in Hammers}}{\text{Change in Wrenches}}$.

Try solving on your own before revealing the answer!

Final Answer: Marginal opportunity cost = -0.75 hammers per wrench

$\text{Change in Hammers} = 29 - 35 = -6$

$\text{Change in Wrenches} = 30 - 22 = 8$

$\text{Marginal Opportunity Cost} = \frac{-6}{8} = -0.75$

This means for each additional wrench produced, 0.75 hammers must be given up.