A (very, very small) country produces milk and shirts and its production possibilities frontier is in the table above
a. The nation is currently producing at point B. What is the opportunity cost of two additional gallons of milk? At point C? At point D? What do your results show?
b. Suppose the nation is initially producing 4 gallons of milk and 40 shirts. What is the opportunity cost of 2 additional gallons of milk? Explain your answer.
a. At point B, the opportunity cost of 2 additional gallons of milk is 20 shirts. At point C, the opportunity cost of 2 additional gallons of milk at 30 shirts. At point D, the opportunity cost of 2 additional gallons of milk is 40 shirts. The opportunity cost of 2 additional gallons of milk increases as more milk is produced.
b. Producing 4 gallons of milk and 40 shirts means that the nation is producing at a point within the interior of its production possibilities frontier. Hence the opportunity cost of producing an additional 2 gallons of milk is 0. The opportunity cost is 0 because at a production point in the interior of the production possibilities frontier there are unemployed resources. These unemployed resources can be put to work producing the additional 2 gallons of milk. Because they were not producing anything previously, there is no decrease in the production of shirts and hence no opportunity cost.
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