OPPORTUNITY COST
Practice Problems

1. Consider a simple economy producing two goods: cars and milk. The following table gives several points on this economy's production possibility frontier.

Cars (1000's/year)
Milk (1000's of gallons/ year)
0
60
1
50
2
30

3

0

a. Graph this economy's production possibility frontier.
b. Why is the production possibility frontier downward sloping? Be sure to explain economic intuition behind that fact.
c. Why is the production possibility frontier concave? Be sure to explain economic intuition behind that fact.
d. Suppose the economy is currently producing 2000 cars and 30,000 gallons of milk. What is the opportunity cost of producing additional 20,000 gallons of milk?
e. The synthetic production of Bovine Growth Hormone (BGH) allows dairy farmers to get twice as much milk from each cow. In terms of this production possibility frontier, this means that this economy can now produce twice as much milk at each level of car output. With the economy currently producing 2000 cars, Jerry claims that the development of BGH allows the economy to produce more milk and more cars.
Do you agree? Explain carefully, using an appropriate diagram to illustrate your answer.

2. A team consisting of three people is working on a big project, which involves manual entry of data in a computer, with subsequent processing of these data and making a poster presentation.
Naturally, each member of the team has different abilities in performing either task. Absent-minded Adam can make 1 poster or 400 data entries in a day. Hard-working Becci can make 2 posters or 1200 data entries in a day. Artistic Cliff can make 3 posters or 900 entries in a day.
a. Originally, the entire team (each of them having their own personal computer) starts with entering data. How many entries will be made in a day?
b. Gradually, it is time to start making posters, so you decide to assign one member of the team to this task. Whom would you choose? Explain why.
c. As you make this decision, what is the opportunity cost of each poster made?
d. As there is less and less data remaining to be entered, another person can shift to making posters as well. Which of the remaining two members of the team will you choose this time? Explain your choice. As a result, what is the opportunity cost of each additional poster you will get?
e. Draw a sketch of your team's production possibility frontier on any given day on graph paper, putting the number of numerical entries on the vertical axis and the number of posters on the horizontal axis.
f. What does the order in which you reassign your team members from data entry to making posters imply about the shape of your PPF? Which important economic principle does this fact illustrate?

 


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