Question

Econoline Company produces only two goods and they operate with limited resources. The production manager decides to conduct an analysis of its production possibilities to determine the best use of its limited resources. They create a Production Possibility Frontier (PPF) diagram to represent the maximum combinations of good X and good Y that can be produced with their available resources. As the output of Good Y increases along the frontier, which of the following changes involves the largest opportunity cost? a) b) c) d) 0 to 5 units 5 to 10 units 10 to 15 units 15 to 20 units

Answer 1

The concept of opportunity cost refers to the value of the next best alternative foregone when a decision is made. In the context of a Production Possibility Frontier (PPF), moving along the frontier implies reallocating resources from one good to another. The largest opportunity cost typically occurs where resources are shifted from the production of the good at which the economy has a comparative advantage to the one at which it has a comparative disadvantage.

In this case, the largest opportunity cost would likely be associated with the change from a) 0 to 5 units of Good Y, as it represents the initial shift from producing only Good X to introducing the production of Good Y.

Answer 2

The largest opportunity cost for producing Good Y on a typical outward-bending Production Possibility Frontier (PPF) would be incurred in the transition from 15 to 20 units, (option d) as resources are usually most specialized at that point.

Step-by-step explanation:

Opportunity cost is a fundamental concept in economics that describes the cost of forgoing the next best alternative when making a decision. In the context of a Production Possibility Frontier (PPF), which represents the maximum combinations of two goods that a company can produce with its available resources, the opportunity cost of producing one good increases as you produce more of it if the PPF is bowed outward. This increasing opportunity cost is reflected in the concave shape of the PPF; hence, as more units of Good Y are produced, the quantity of Good X that must be given up increases. Based on this understanding, the interval involving the largest opportunity cost for producing Good Y would generally be from 15 to 20 units if we assume a typical outward-bending PPF, because it represents the production range where resources are most specialized in the production of Good X, and thus, diverting them to produce Good Y incurs a higher opportunity cost.