Chapter 1: Limits, Alternatives, and Choices
Practice Problems
Problem 1: Production Possibilities
A society produces two goods, corn and cars, and faces the following production possibilities. Corn is measured in units of 100,000 bushels, cars in units of 100,000.
| Combination | Corn | Cars |
|---|---|---|
| A | 0 | 7 |
| B | 7 | 6 |
| C | 13 | 5 |
| D | 18 | 4 |
| E | 22 | 3 |
| F | 25 | 2 |
| G | 27 | 1 |
| H | 28 | 0 |
- Plot the data to obtain a production possibilities curve, with corn on the vertical axis and cars on the horizontal axis.
- Fill in the opportunity cost, in units of corn, of producing the 1st through 7th car unit.
- What is the marginal opportunity cost of the 3rd car unit, in units of corn?
- What is the total opportunity cost of producing 6 car units, in units of corn?
Show Answer
- Opportunity cost per car unit, in corn: 1st = 1, 2nd = 2, 3rd = 3, 4th = 4, 5th = 5, 6th = 6, 7th = 7 (moving from H back to A, one car unit at a time, each additional car costs one more unit of corn than the last, the law of increasing opportunity cost).
- The marginal opportunity cost of the 3rd car unit is 3 units of corn.
- The total opportunity cost of producing 6 car units (moving from H to B) is 21 units of corn (28 minus 7), which also matches summing the first six marginal costs: 1 plus 2 plus 3 plus 4 plus 5 plus 6.
Problem 2: Opportunity Cost with Two Goods
A society produces two goods, pizzas and pizza ovens. It is currently producing at point C: 45 units of pizzas and 11 units of pizza ovens. Two other attainable points on the same production possibilities curve are point B (60 pizzas, 6 ovens) and point D (30 pizzas, 15 ovens).
- Using points B and C, what is the opportunity cost of one more unit of pizzas?
- Using points C and D, what is the opportunity cost of one more unit of pizza ovens?
Show Answer
- Moving from C to B: pizzas rise by 15 (60 minus 45), ovens fall by 5 (11 minus 6). Giving up ovens to get pizzas: 5 ovens divided by 15 pizzas equals 0.33 ovens per pizza. The opportunity cost of one more pizza is about a third of an oven.
- Moving from C to D: pizzas fall by 15 (45 minus 30), ovens rise by 4 (15 minus 11). Giving up pizzas to get ovens: 15 pizzas divided by 4 ovens equals 3.75 pizzas per oven. The opportunity cost of one more pizza oven is 3.75 pizzas.
Notice the two answers are not simple reciprocals of each other, since the curve is not a straight line, the opportunity cost changes depending on which section of the curve you are on. That is the law of increasing opportunity cost in action.