Answer to Question #232241 in Macroeconomics for Nana

Question

The Syejumba Economy is a very simple economy producing Vigayo and Gallons of Maize. The information below gives production points of the two commodities in the economy.
Vigayo -0......Maize(1000's Gallons/year) - 600
Vigayo -1..... Maize(1000's Gallons/year) - 500
Vigayo - 2..... Maize(1000's Gallons/year) - 300
Vigayo - 3..... Maize(1000's Gallons/year) - 0
a) Graph the production possibility frontier of the Syejumba Economy
b) What is the direction of the slope of the production possibility frontier of the Syejumba Economy? Explain the intuition behind that fact.
c) What is the shape of the production possibility frontier of the Syejumba Economy? Explain the intuition behind that fact.
d) Suppose the Syejumba Economy is currently producing 2,000 Vigayo and 30,000 gallons of Maize. What is the opportunity cost of producing additional 20,000 gallons of Maize?

Answer 1

a)

Graph the production possibility frontier of the Syejumba Economy

In the above graph, the blue-colored curve is the production possibility frontier.

b)

Production possibility frontier is downward sloping and .

As we move along the production possibility frontier, the slope increases. Increasing slope shows that as we increase the production of one good, we have to sacrifice the production of another good at an increasing rate thus the increasing slope suggests increasing opportunity costs.

c)

Production possibility frontier is concave to the origin.

As we move along the production possibility frontier, the slope increases. Increasing slope shows that as we increase the production of one good, we have to sacrifice the production of another good at an increasing rate thus the increasing slope suggests increasing opportunity costs.

d)

If additional 20,000 gallons of Maize is produced, then Maize production increases to 50,000 gallons. To be able to produce additional 20,000 gallons of Maize, 1,000 Vigayo must be sacrificed. 

Thus opportunity cost is 1,000 Vigayo.