Question

A PPF shows the production possibilities for boats and cars. At point D on the curve, 30 boats and 30 cars are produced. At point E on the curve, 20 boats and 32 cars are produced. What is the opportunity cost on one car?

Answer 1

Since the production possibility can be defined as a line which is summation of different combinations of two different goods which can be produced with the available resources by using it efficiently.

A PPF shows the production possibilities for boats and cars.

At point D on the curve, 30 boats and 30 cars are produced.

At point E on the curve, 20 boats and 32 cars are produced.

Since for producing 2 extra cars, the number of boats which should be sacrificed are=10 boats

Since for producing 1 extra cars, the number of boats which should be sacrificed are=10/2 boats

=5 boats.

Hence the opportunity cost on one car is 5 boats.