Reference no: EM131766

Question: Consider that a country can produce just two things: goods and services. Suppose that over a given period it could produce any of the subsequent combinations:

(a) Show the country's production possibility curve.

(b) Consider that the country is currently producing 40 units of goods and 70 units of services, what is the opportunity cost of producing another 10 units of goods?

(c) Describe how the figures illustrate the principle of increasing opportunity cost.

(d) Now consider that technical progress leads to a 10 per cent increase in the output of goods for any given amount of resources.

Show the new production possibility curve.

How has the opportunity cost of producing extra units of services altered?

(a) See the continuous line in graph below.

(b) 5 units of services. Producing another 10 units of goods means producing a total of 50 units of goods.Therefore, referring to the table, production of services has to be reduced from 70 units to 65 units: a sacrifice of 5 units of services.

(c) Each additional 10 units of goods produced involves an increasing sacrifice of services. Thus increasing production of goods from 0 to 10, to 20, to 30, to 40, etc. adds a sacrifice of 1 (80-79), then 2 (70-77), then 3 (77-74), then 4 (74-70), etc. units of services.

Similarly, increasing the production of services involves an increasing sacrifice of goods. This will be seen by starting at the right-hand end of the table and moving to the left. Smaller and smaller increases in services are get for each extra 10 units of goods sacrifice: in other words, for each extra units of services obtained, more and more goods must be sacrificed.

(d) See the dashed line in Diagram below. The opportunity cost of producing extra services has increased (by 10 per cent): in other words, each extra unit of services produced involves a sacrifice of 10 per cent more goods than previously.