Answer to Question #132078 in Microeconomics for carlos

Question

The nation of Rougarou is able to produce turnips and potatoes in combinations represented by the data in the following table. Each number represents thousands of bushels.

A B C D E

Turnips 100 90 70 40 0

Potatoes 0 10 20 30 40

Plot this data on a production possibilities graph and explain why the data shows that Rougarou experiences increasing opportunity costs.

Answer 1

A production possibility curve (PPC) is a locus of all possible combinations of potatoes and turnips that Rougarou can produce using the scarce resources to the maximum extent possible. The PPC of the data is shown below.

The PPC drawn passes through the given points A, B, C, D, and E. The graph is concave to the origin. The concavity of the PPC results in increasing gradient from left to right. The gradient of the PPC is called the marginal rate of transformation (MRT) and it represents opportunity cost.

On the graph, the slope of MRT2 at point B is more steep than that of MRT1 at point D indicating that the gradient, hence opportunity cost, is increasing as more and more potatoes are substituted for turnips.

Thus, the concavity of the PPC representing the given points A, B, C, D, and E shows that Rougarou experiences increasing opportunity cost.