Examkin

Question

Difficulty: HardOpportunity Cost

The table below shows the Production Possibility Schedule for an agricultural firm in Enugu producing Palm Oil and Rice using a fixed set of resources:

CombinationPalm Oil (tons)Rice (tons)
P0100
Q2090
R3570
S4540
T500

If the firm reallocates its resources to move production from Combination R to Combination S, what is the opportunity cost per additional ton of Palm Oil produced, and what underlying economic process does this movement represent?

  1. 33 tons of Rice, representing a trade-off via reallocation of existing resources along the curveAnswer
  2. B
    3030 tons of Rice, representing an outward shift of the Production Possibility Curve due to technological growth
  3. C
    The monetary expenditure required to harvest 1010 additional tons of Palm Oil
  4. D
    1010 tons of Palm Oil, representing an inward shift of the Production Possibility Curve

Answer

The opportunity cost is 33 tons of Rice per additional ton of Palm Oil, representing a trade-off via reallocation of existing resources along the curve.
The correct answer accurately calculates the marginal opportunity cost (3030 tons of Rice sacrificed divided by 1010 tons of Palm Oil gained = 33 tons of Rice per ton of Palm Oil) and correctly identifies that choosing a different production combination using a fixed resource base constitutes movement along the Production Possibility Curve.

Step-by-Step Solution

1
Calculate the gain in Palm Oil output when moving from Combination R to Combination S
Gain in Palm Oil = 45−35=1045 - 35 = 10 tons
To find the additional units of Palm Oil produced.
2
Calculate the total sacrifice of Rice output when moving from Combination R to Combination S
Sacrifice of Rice = 70−40=3070 - 40 = 30 tons
Opportunity cost is defined by the foregone alternative output.
3
Compute the unit opportunity cost of Palm Oil
Unit Opportunity Cost = 30 tons of Rice10 tons of Palm Oil=3\frac{30\text{ tons of Rice}}{10\text{ tons of Palm Oil}} = 3 tons of Rice
Dividing the sacrificed good by the gained good yields the marginal opportunity cost per unit.
4
Determine the economic interpretation of the movement
Movement along the existing Production Possibility Curve (PPC)
Reallocating fully employed, fixed resources between two goods results in movement along the PPC, not a shift of the curve.

Key Concept

Opportunity Cost and Movement along the Production Possibility Curve
Rate this question

Topics

Opportunity Cost

More questions from this topic