Microeconomics Final Exam Review: Production Possibilities Frontier & Opportunity Cost

Q1. Assume we are at combination B. What is the opportunity cost of increasing clothes production from 0 units to 100 units (moving to combination C)?

Background

Topic: Production Possibilities Frontier (PPF) and Opportunity Cost

This question tests your understanding of the PPF, which shows the maximum possible combinations of two goods that can be produced given available resources and technology. It also examines your ability to calculate opportunity cost, which is the value of the next best alternative foregone when making a choice.

Key Terms and Formulas

• Production Possibilities Frontier (PPF): A curve depicting all maximum output possibilities for two goods, given a set of inputs.

• Opportunity Cost: The amount of one good that must be given up to produce more of another good.

• Formula for Opportunity Cost:

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

Step-by-Step Guidance

1. Examine the PPF graph and identify the coordinates for combination B and combination C. Combination B is at (0 clothes, 100 food), and combination C is at (100 clothes, 75 food).

2. Determine the change in clothes production: $\text{Change in Clothes} = 100 - 0 = 100$ units.

3. Determine the change in food production: $\text{Change in Food} = 75 - 100 = -25$ units. The negative sign indicates a decrease in food output.

4. Interpret the opportunity cost: The opportunity cost of producing 100 more units of clothes is the amount of food that must be given up, which is the difference in food between B and C.

Try solving on your own before revealing the answer!

Final Answer: 25 units of food

Moving from combination B to C, the opportunity cost of increasing clothes production from 0 to 100 units is 25 units of food (100 - 75 = 25).

This means you must give up 25 units of food to produce 100 more units of clothes.