Question

Following is the production possibilities schedule for an economy producing two goods Good A and Good B.

Good A Good B
Choice 1 100 0
Choice 2 90 20
Choice 3 70 40
Choice 4 40 60
Choice 5 0 80
According to the production possibilities schedule in the table above, which of the following statements is true?
A)Moving from choice 2 to choice 3, the opportunity cost of 20 more B is 20 units of A.
B)There are increasing opportunity costs associated with getting more B.
C)Moving from choice 3 to choice 4, the opportunity cost of 20 more B is 30 units of A.
D)Moving from choice 1 to choice 2, the opportunity cost of 20 more B is 10 units of A.
E)All of these statements are true.

Answer 1

E. ALL STATEMENTS ARE TRUE

Step-by-step explanation:

PPF is representation of two goods that can be produced by an economy, given resources & technology. It is downward sloping because of negative relationship between two goods given same resources & technology.

Opportunity cost is the cost if next best alternative forgone while making a choice. In this case it is amount of Good A sacrifised to gain Good B.

Choice GoodA GoodB Opportunity Cost [ ∆GoodA/∆GoodB ]

1 100 0 _

2 90 20 -10:20 (90-100) : (20-0)

3 70 40 -20:20 (70-90):(40-20)

4 40 60 -30:20 (40-70): "

5 0 80 -40:20 (0-40): "

So : Options A,C,D - all are correct. From Choice 1 to 2, 20 good B have been gained by sacrifising 10 good A. From Choice 2 to 3, 20 good B have been gained by sacrifising 20 good A. From Choice 3 to 4, 20 good B have been gained by sacrifising 30 good A.

Option B is also correct: As the Opportunity cost of gaining same amount of good B (in terms of sacrifised good A) is increasing each time successively over its preceding good A sacrifise. [10 < 20 < 30 < 40]. This makes PPF concave also.