Question

On an island economy there is an endowment of 80 units of labor. The two production functions are X =

4Lx and Y = 0.5Ly. In this case, the opportunity cost of one unit of good Y is ______ units of good X.

(a.) 4

(b.) 6

(c.) 8

(d.) 10

Answer 1

Given production functions

X = 4Lx and Y = 0.5Ly

And total number of labours = 80

Now suppose all labour are used for good X then, number of goods X produced.

X = 4*80 = 320

320 units of good X will be produced.

If all labour is used to produce good Y. Then,

Y = 0.5*80 = 40

40 units of good Y will be produced.

Now opportunity cost of producing q unit of good Y is

= (benefits forgone of good X)/(benefits gain from Y)

= 320/40

= 8.

Therefore opportunity cost of producing 1 unit of Good Y is 8 units of good X.