Assume a society can produce either beer or wine. If the marginal rate of transformation of gallons of beer into gallons of wine is 0.5, then the opportunity cost of beer is
A) the 2 gallons of beer that must be forgone.
B) the 2 gallons of wine that must be forgone.
C) the 0.5 gallons of beer that must be forgone.
D) the additional 0.5 gallons of beer that can be produced.

Question

Quizplus · Accepted Answer

The marginal rate of transformation (MRT) indicates how much of one good must be given up to produce an additional unit of another good. An MRT of 0.5 means that to produce one more gallon of wine, 0.5 gallons of beer must be forgone. Therefore, the opportunity cost of producing an additional gallon of wine is 0.5 gallons of beer. However, the question asks for the opportunity cost of beer, which is the inverse of the MRT, meaning 2 gallons of wine must be forgone to produce an additional gallon of beer.

Assume a Society Can Produce Either Beer or Wine