Question

Below is a production possibilities table for consumer goods (butter) and capital goods (guns).

Production Possibilities

Type of Production Production Alternative A Production Alternative B Production Alternative C Production Alternative D Production Alternative E Production Alternative F Production Alternative G Butter 0 1 2 3 4 5 6 Guns 14 13 11 9 7 4 0

Graph the data provided in the table using Excel. (Hints: Type your data into an Excel spreadsheet. With your mouse, highlight the data only. Go to insert. Click on scatter. Click on smooth lines chart. Select the line chart. Plot data drawing line.)

Based on the graph you created, complete the following:

Determine if allocating advertising expenditures to boost sales or investing in a new plant and equipment would entail the greater opportunity cost. Explain and support your response.

Answer 1

Opportunity cost is the value of next best alternative foregone. It shows how much units of guns producer has to sacrifice to produce one more unit of butter. To increase production of butter from 1 unit to 2 units, producer has to sacrifice 2 (13 - 11) units of guns.

The basic problem of economics is scarcity in which human wants are unlimited and resources are scarce. By using opportunity cost we are concerned with the optimal use and distribution of these scarce resources.