Practice with Production Possibilities Frontiers and Opportunity Cost

1. Suppose that the nation of Chrysler produces cars and tractors. Below are the possible combinations of cars and tractors that Chrysler can produce.

Combination Autos Tractors

A 0 12

B 4 9

C 7 6

D 9 3

E 10 0

a. Plot the Production Possibilities Frontier for Chrysler.

b. What is the opportunity cost of the first 4 autos produced?

c. Between which two points is the opportunity cost per automobile the

highest?

d. Between which points is the opportunity cost per tractor the highest?

e. Label point F at the combination of 4 automobiles and 12 tractors. What

term best describes this point?

f. Label point G at the combination of 4 automobiles and 6 tractors. What term best describes this point?

g. What term describes points A through E? Why?

h. Does this PPF reflect the law of increasing opportunity costs? How can we tell

graphically?

i. Draw a new curve reflecting what the PPF might look like if new door manufacturing technology is invented (in the automobile industry but it has no use in the tractor industry).

2. Suppose that the nation of Chrysler produces cars and tractors. Below are the possible combinations of cars and tractors that Chrysler can produce.

Combination Autos Tractors

A 0 12

B 2 9

C 4 6

D 6 3

E 8 0

a. Plot the Production Possibilities Frontier for Chrysler.

b. What is the opportunity cost of the first auto produced?

c. What is the opportunity cost of the first tractor produced?

d. Between which two points is the opportunity cost per thousand automobiles the

highest?

e. Between which points is the opportunity cost per tractor the highest?

f. Does this PPF reflect the law of increasing opportunity costs? How can we tell

graphically?

g. Draw a new curve reflecting what the PPF might look like if new technology

is invented which makes labor more productive in both industries.

h. What phrase describes the movement from the initial PPF in part a to the new PPF in

part g?

i. Which graph is more realistic for a PPF, the graph on this page or the graph on the front of the handout? Why?