Question

1. The table below shows PPF for a country. Use it to answer the following questions:

1. Calculate the opportunity cost of a pound of corn. Make a table that shows the opportunity cost of a pound of corn as we increase   wheat production and decrease corn production.
2. If we currently produce 14 pounds of corn and 26 pounds of wheat a day, calculate the opportunity cost of a pound of wheat and of a pound of corn. Explain your answer.
3. If we increase corn production from 14 to 18 pounds and decrease the production of wheat from 38 to 26 pounds, what is the opportunity cost of a pound of corn? Explain your answer.
4. Does the opportunity cost of a pound of wheat increase as we produce more wheat? Explain why or why not.

Point		Wheat		Corn
a		0		56
b		8		48
c		14		38
d		18		26
e		20		14
f		22		0

Answer 1

A country produces 2 goods only wheat and corn.

The production possibility frontier is given below:

Point	Wheat	Corn
a	0	56
b	8	48
c	14	38
d	18	26
e	20	14
f	22	0

a. By giving up 1 unit of corn how much wheat can be produced is the opportunity cost of corn.The opportunity cost of a pound of corn is calcuated below:

Point	Wheat	Corn	Opportunity Cost
a	0	56
b	8	48	=(8-0)/(48-56)=-1
c	14	38	(14-8)/(38-48)=-0.6
d	18	26	(18-14)/(26-38)=-0.33
e	20	14	(20-18)/(14-26)=-0.167
f	22	0	(22-20)/(0-14)=-0.142

By giving up 1 unit of corn , with increased production of wheat, less and less units of wheat can be produced.

b. If we are currently producing 14 pounds of corn and 20 pounds of wheat a day. To produce one more unit of corn, (20-18)/(26-14)=0.167 units of wheat needs to be sacrificed. Therefore, the opportunity cost of corn is 0.167 units of wheat.

To produce one more unit of wheat, (14-0)/(22-20)=7 units of corn needs to be sacrificed. Therefore, the opportunity cost of wheat is 7 units of corn.

c. If corn production is increased from 14 to 18 and wheat production is decreased form 38 to 26 then by losing 12 units of wheat 4 units of corn is produced. for per pound of corn 3 pounds of wheat have been sacrificed.Therefore, the opportunity cost of corn pound is 3 pounds of wheat.

d. As we produec more and more wheat, the opportunity cost of a pound of wheat increases as more and more pounds of corn needs to be sacrificed for additional pound of wheat due to law of diminishing marginal returns.