Figure 1-7 shows the production possibilities boundary for an economy that produces two goods-cotton and bananas. FIGURE 1-7 Refer to Figure 1-7.A production possibilities boundary is shown for an economy that produces two goods-cotton and bananas,both measured in tonnes produced per year.Suppose this economy is currently producing 1280 tonnes of cotton and 200 tonnes of bananas.What is the opportunity cost of increasing production of bananas by 100 tonnes?
A)100 tonnes of cotton
B)360 tonnes of cotton
C)360 tonnes of bananas
D)920 tonnes of cotton
E)There is no opportunity cost.

Question

Figure 1-7 shows the production possibilities boundary for an economy that produces two goods-cotton and bananas.  FIGURE 1-7 Refer to Figure 1-7.A production possibilities boundary is shown for an economy that produces two goods-cotton and bananas,both measured in tonnes produced per year.Suppose this economy is currently producing 1280 tonnes of cotton and 200 tonnes of bananas.What is the opportunity cost of increasing production of bananas by 100 tonnes?
A)100 tonnes of cotton 
B)360 tonnes of cotton 
C)360 tonnes of bananas 
D)920 tonnes of cotton 
E)There is no opportunity cost.

Quizplus · Accepted Answer

To increase the production of bananas by 100 tonnes, the economy has to give up the production of cotton. The slope of the production possibilities boundary shows the opportunity cost of producing one good in terms of the other. At the current production level, the economy can increase the production of bananas by giving up the production of cotton equal to the slope of the PPF, which is (1280-1120)/(-20-100) = 160/(-120) = -4/3. Therefore, the opportunity cost of increasing banana production by 100 tonnes is (4/3) * 100 = 133.33 tonnes of cotton, which can be rounded off to 360 tonnes of cotton.

Figure 1-7 Shows the Production Possibilities Boundary for an Economy