The accompanying figure shows the annual production possibilities curve for a small country that is open to trade with the rest of the world. Suppose the world price of cashews is $12 per pound, and the world price of mangos is $4 per pound. As indicated in the figure, at these prices, this country will produce 21,000 pounds of mangos and 5,000 pounds of cashews each year. At this country's current level of production, what is the opportunity cost of a pound of mangos in terms of cashews?

Question

The accompanying figure shows the annual production possibilities curve for a small country that is open to trade with the rest of the world. Suppose the world price of cashews is $12 per pound, and the world price of mangos is $4 per pound. As indicated in the figure, at these prices, this country will produce 21,000 pounds of mangos and 5,000 pounds of cashews each year.  At this country's current level of production, what is the opportunity cost of a pound of mangos in terms of cashews?

Quizplus · Accepted Answer

The opportunity cost of producing mangos in terms of cashews is given by the slope of the production possibilities curve. At this country's current level of production, we know the slope of the production possibilities curve is equal to slope of the consumption possibilities curve, and the slope of the consumption possibilities curve is equal to the price of mangos divided by the price of cashews, or $4/$12 = 1/3. Thus, the opportunity cost of producing mangos in terms of cashews is 1/3. That is, at this country's current level of production, it has to give up 1/3 pounds of cashews for every pound of mangos produced.

The Accompanying Figure Shows the Annual Production Possibilities Curve for a Small