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Difficulty: MediumProduction Possibility Curve (PPC)

An economy operating on its Production Possibility Curve produces two goods: Rice (in tonnes) and Tractors (in units). Currently, it produces 4040 tractors and 100100 tonnes of rice. When resources are reallocated to increase tractor production to 5050 units, rice production falls to 7070 tonnes. What is the opportunity cost of producing one additional tractor, expressed in tonnes of rice?

Answer: 3 tonnes of rice

Answer

The opportunity cost of producing one additional tractor is 3 tonnes of rice.
Along a Production Possibility Curve, the opportunity cost of producing an extra unit of one commodity is measured by the amount of the alternative commodity given up divided by the gain in the specified commodity. Sacrificing 3030 tonnes of rice to obtain 1010 additional tractors yields an opportunity cost of 33 tonnes of rice per tractor.

Step-by-Step Solution

1
Determine the change in tractor output (good gained)
ΔTractors=50−40=10 units\Delta \text{Tractors} = 50 - 40 = 10\text{ units}
To find per-unit opportunity cost, first calculate the total increase in tractor output.
2
Determine the change in rice output (good sacrificed)
ΔRice=100−70=30 tonnes\Delta \text{Rice} = 100 - 70 = 30\text{ tonnes}
Opportunity cost represents the quantity of alternative output foregone.
3
Calculate the marginal rate of transformation / opportunity cost per unit
\text{Opportunity Cost per tractor} = \frac{30}{10} = 3\text{ tonnes of rice}
Dividing the sacrificed amount of rice by the additional tractors produced gives the cost per extra tractor.

Key Concept

Opportunity Cost and Marginal Rate of Transformation on the PPC
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Topics

Production Possibility Curve (PPC)

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