Question

Choco Dream is a firm that produces both dark chocolates as well as liquor chocolates. During a given​ month, the firm uses its resources to produce both varieties.​ Initially, the firm produced​ 5,000 bars of dark chocolates and​ 4,000 bars of liquor chocolates in a month. In order to increase production of the latter to​ 4,500, they had to reduce production of dark chocolates by 800 bars. When demand for liquor chocolates increased​ further, Choco Dream produced​ 5,000 bars of liquor chocolates and​ 3,200 bars of dark chocolates per month. Which of the following inferences can be drawn from the given​ information? A. Choco​ Dream's production possibilities frontier is linear. B. Both types of chocolates sold by Choco Dream are equally popular among consumers. C. Resources are equally productive in the production of both types of chocolates. D. The company is operating at one end of the PPF. E. Choco Dream faces increasing marginal opportunity cost in the production of liquor chocolates.

Answer 1

E) Choco Dream faces increasing marginal opportunity cost in the production of liquor chocolates.

Explanation:

When Choco Dream increased their production of liquor chocolates by 500 units (to 4,500 bars per month), their opportunity was 800 units of dark chocolate. But when they needed to increase liquor chocolates by 500 more units (to 5,000 bars per month), then the opportunity cost increased to 1,000 units of dark chocolate.

That means that for the first 500 extra liquor bars, the opportunity cost = 800 dark chocolate bars / 500 liquor bars = 1.6 dark chocolate bars for every extra liquor bar.

The second increased required a higher opportunity cost = 1,000 dark chocolate bars / 500 liquor bars = 2 dark chocolate bars for every extra liquor bar.