· the dollar value of whatever you give up in order to do the activity, minus
· whatever dollar “savings” the activity generates
In this case, the direct cost of transportation, lift tickets and accommodation of $300 is definitely included. The income of $120 that you give up also counts. Finally, we must deal with the restaurant meals of $75. Surely you would have eaten some food even if you hadn’t gone skiing, so the full $75 is not included. But given the relatively high price of restaurant meals compared to buying your own groceries, you will probably include most of the $75. Thus the opportunity cost of the ski trip is $420 plus some (large) fraction of the $75.
Question 15
a) The budget line is shown below. If all $240,000 is spent on ATVs, you could purchase 30 of them; if all the money is spent on snowmobiles, you could purchase 20 of them. The downward sloping line divides the attainable from the unattainable combinations of ATVs and snowmobiles.
b) The opportunity cost of one ATV is the number of snowmobiles that must be given up to purchase an additional ATV. Since each ATV costs $8000 and each snowmobile costs $12000, the opportunity cost of one ATV is 2/3 of a snowmobile.
c) The opportunity cost of one snowmobile is the number of ATVs that must be given up to purchase an additional snowmobile. It is equal to 1.5 ATVs. Note that the opportunity cost of an ATV (in terms of forgone snowmobiles) is the inverse of the opportunity cost of a snowmobile (in terms of forgone ATVs).
d) In this case, the prices of ATVs and snowmobiles are independent of how many are purchased. This fact is reflected by the budget line being linear (of constant slope). So both of the opportunity costs are independent of how many are purchased.
Question 16
In each scenario, one could choose to plot the production possibilities boundary, where the two numbers provided are the two intercepts along the two axes. The slope of the boundary would show the opportunity cost of each door (or each window). Alternatively, one can compare the two maximum values, as provided in the question.
a) The factory could produce either 1000 windows or 250 doors (or many intermediate combinations). In order to produce one extra door, it must give up 4 (=1000/250) windows. In other words, the opportunity cost of one extra door is 4 windows.
b) The opportunity cost of one extra door is 1 window (=500/500).
c) The opportunity cost of one extra door is 3 windows (=1200/400).
d) The opportunity cost of one extra door is 1.35 windows (=942/697).
e) The opportunity cost of one extra door is 1.33 windows (=600/450).
Question 17
This question is good for forcing students to think through the computation of opportunity cost and also in showing how the allocation of labour in particular ways can maximize total output.
a) You can catch 6 fish or collect 3 bundles of firewood in one day’s work. Thus, your opportunity cost of one additional bundle of firewood is 2 fish. For your friend, the opportunity cost of one additional bundle of firewood is 4 fish.
b) To allocate tasks in the output-maximizing way, each person should do the task for which they have the lower opportunity cost. You have the lower opportunity cost of collecting firewood. Your friend has the lower opportunity cost of catching fish (0.25 of a bundle for your friend as compared to 0.5 of a bundle for you). So for the two of you to collectively maximize output you should specialize in collecting firewood and your friend should specialize in catching fish.
c) What is the total amount of output after two days, if you allocate labour as in part (b)? In two days, you would collect 6 bundles of firewood and your friend would catch 16 fish. The reverse pattern of specialization would yield only 4 bundles of firewood and 12 fish, which is clearly inferior.
Question 18
a) At point A, 2.5 tonnes of clothing and 3 tonnes of food are being produced per year. At point B, annual production is 2.5 tonnes of clothing and 7 tonnes of food. At point C, annual production is 6.5 tonnes of clothing and 3 tonnes of food.
b) At point A the economy is either using its resources inefficiently or it is not using all of its available resources. Point B and C represent full and efficient use of available resources because they are on the PPB.
c) At point B, the opportunity cost of producing one more tonne of food (and increase from 7 to 8) is the 2.5 tonnes of clothing that must be given up. The opportunity cost of producing one more tonne of clothing (from 2.5 to 3.5) appears, from the graph, to be approximately 0.75 tonnes of food that must be given up.
d) Point D is unattainable given the economy’s current technology and resources. Point D can become attainable with a sufficient improvement in technology or increase in available resources.