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calculating opportunity costs, production possibility

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There are five exercises in this solution set. The problem set is attached. For convenience sake, I am providing the question in Exercise 1: Use the following production possibility tables for war goods and civilian goods.

Production Alternatives
Type of Production A B C D E
Automobiles 0 2 4 6 8
Missiles 30 22 18 10 0

If the economy is at point C, what is the cost of one more automobile? What is the cost of one more missile?

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Exercise 1:
In order to explain the math I have assigned variables as follows (note the capital letter represents the column and the lower case letter represents the good):
A B C D E
Aa Ba Ca Da Ea
Am Bm Cm Dm Em

If the economy is at the point C, what is the cost of one more automobile?
Answer: The cost of one more automobile is the opportunity cost of foregoing the production of another missile. Therefore the cost of one more automobile is (Cm-Dm)/(Da-Ca). The answer being (18-10)/(6-4)=4. The cost of producing one more automobiles is 4 missiles.
If the economy is at the point C, what is the cost of one more missile?
Answer: The cost of one more missile is the opportunity cost of foregoing the production of another automobile. Therefore the cost of one more missile is (Ca-Ba)/(Bm-Cm). The answer ...

Solution Summary

The expert calculates the opportunity costs and production possibilities. Production alternatives are given for convenience sakes.

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See Also This Related BrainMass Solution

Calculating Opportunity Cost: Chickens and Potatoes Example

Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds of potatoes per year. If she devotes all her resources to raising chickens, she can raise 50 chickens per year. (If she apportions some resources to each, then she can produce any linear combination of chickens and potatoes that lies between those extreme points. If James devotes all his resources to growing potatoes, he can raise 80 pounds of potatoes per year. If he devotes all his resources to raising chickens, he can raise 40 chickens per year. (If he apportions some resources to each, then he can produce any linear combination of chickens and potatoes that lies between those extreme points.)

Potatoes Chickens
Michelle 200 50
James 80 40

- What is Michelle's opportunity cost of producing potatoes?
- What is Michelle's opportunity cost of producing chickens?
- What is James' opportunity cost of producing potatoes?
- What is James' opportunity cost of producing chickens?
- Which person has an absolute advantage in which activities?
- Which person has a comparative?
- Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain.
- How would you extend the above narrative to businesses, society as a whole or nations? Explain.

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