FIGURE 1- 5 )
-Suppose that a bakeshop with 5 employees can produce both pies and cakes.In one day,if all resources are devoted to baking pies,the shop can produce 125 pies; if all resources are devoted to baking cakes,the shop can produce 50.What is the shop's opportunity cost of producing any one cake?
A)0.4 cakes
B)2.5 cakes
C)2.5 pies
D)0.25 pies
E)0.4 pies

Question

FIGURE 1- 5 ) 
-Suppose that a bakeshop with 5 employees can produce both pies and cakes.In one day,if all resources are devoted to baking pies,the shop can produce 125 pies; if all resources are devoted to baking cakes,the shop can produce 50.What is the shop's opportunity cost of producing any one cake?
A)0.4 cakes 
B)2.5 cakes 
C)2.5 pies 
D)0.25 pies 
E)0.4 pies

Quizplus · Accepted Answer

The opportunity cost of producing one cake is the amount of pies that could have been produced instead. To find this, we use the concept of the production possibility frontier (PPF) and its slope, which represents the opportunity cost. The PPF for this bakeshop is a straight line joining the points (0,50) and (125,0) on the pie-cake production graph. The slope of this line is -1/2. This means that for every cake produced, the shop gives up the opportunity to produce 1/2 pies. Therefore, the opportunity cost of producing one cake is 1/(1/2)= 2 pies. So, the correct answer is C: 2.5 pies.