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Difficulty: EasyProduction Possibility Curve (PPC)

An economy is currently operating at point AA on its Production Possibility Curve, producing 120120 units of consumer goods and 5050 units of capital goods. To meet a new production target, the economy shifts resources to point BB, increasing the production of capital goods to 8080 units, while consumer goods production drops to 9090 units. What is the opportunity cost of producing the additional capital goods, expressed in units of consumer goods?

Answer: 30 units

Answer

The opportunity cost of producing the additional 3030 units of capital goods is 3030 units of consumer goods.
When shifting from point AA to point BB, the production of consumer goods decreases from 120120 units to 9090 units. The difference of 3030 units is the quantity of consumer goods foregone to produce 3030 additional units of capital goods.

Step-by-Step Solution

1
Determine the change in consumer goods production.
Initial output = 120120 units, New output = 9090 units.
Opportunity cost along a PPC measures the amount of one good sacrificed to gain more of another good.
2
Subtract the new output level of consumer goods from the initial level.
120−90=30120 - 90 = 30 units.
The reduction in consumer goods represents the foregone benefit (opportunity cost).

Key Concept

Opportunity cost along the Production Possibility Curve is quantified by the amount of one commodity that must be given up to obtain an additional amount of another commodity.
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Production Possibility Curve (PPC)

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