{"id":375,"date":"2016-08-24T00:12:47","date_gmt":"2016-08-24T04:12:47","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/?post_type=chapter&#038;p=375"},"modified":"2017-10-08T21:35:28","modified_gmt":"2017-10-09T01:35:28","slug":"2-2-production-possibility-frontier","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/chapter\/2-2-production-possibility-frontier\/","title":{"raw":"2.2 Production Possibility Frontier","rendered":"2.2 Production Possibility Frontier"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3 itemprop=\"educationalUse\">Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul>\r\n \t<li>Understand how economic models work to simplify complex problems<\/li>\r\n \t<li>Define\u00a0opportunity cost and apply it to daily situations<\/li>\r\n \t<li>Understand how to\u00a0graph and analyze a PPF<\/li>\r\n \t<li>Explain how preferences influence our production decisions<\/li>\r\n<\/ul>\r\n<\/div>\r\n\r\n[caption id=\"attachment_1966\" align=\"alignleft\" width=\"322\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped.jpg\" alt=\"\" width=\"322\" height=\"215\" class=\"wp-image-1966 \" \/> The fires in Fort McMurray were a natural disaster that could not have been anticipated. The devastation severely impacted the economy of Alberta, not to mention the lives of many of its habitats. Although there are many unpredictable aspects to our world, economics develops a simplified framework to make analysis despite these unknowns. (Credit: DarrenRD\/ Wikimedia Commons\/\u00a0CC-BY-SA-4.0)[\/caption]\r\n\r\nThink of all the different variables that can impact trade. A country\u2019s interest rate influences the flow of financial capital; its exchange rate encourages or discourages the purchase of goods and services. The weather can impact the production of goods, and politics can create tension between countries. Many of these examples are macro issues that will impact our micro analysis. How can we navigate such complex economic issues to make normative judgments? The answer is economic models.\r\n\r\n<strong>An economic model<\/strong>\u00a0is a simplified framework that is designed to illustrate complex processes. Oftentimes in introductory Microeconomics, these models seem oversimplified because\u00a0they hold certain variables constant. While one should remain aware\u00a0of this, these models are still useful. Holding some information constant can help us understand a concept without being overwhelmed by a vast number of influencing\u00a0factors. Economic models are the building blocks of most modern economic theory. By understanding these models, we\u00a0can develop a mindset to understand the economic world.\r\n<h1 style=\"text-align: left\">Model of Production<\/h1>\r\n[caption id=\"attachment_1968\" align=\"alignright\" width=\"343\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/pablo-garcia-saldana-36212.jpg\" alt=\"\" width=\"343\" height=\"341\" class=\"wp-image-1968 \" \/> If you were stranded on an island with only pineapples\u00a0and crabs, how much of each would you produce? Would this change depending on how difficult each one was to harvest? (Credit:\u00a0Pablo Garcia Salda\u00f1a\/Unsplash)[\/caption]\r\n\r\nAn economic model is only useful when we understand its underlying assumptions. For this model,\u00a0imagine the following scenario:\r\n\r\nYou are stranded on a tropical island alone. On this island, there are only two foods: pineapples and crabs. In other words, you face a trade-off: any time you spend harvesting pineapples\u00a0is time that cannot be spent looking\u00a0for crabs. You are forced to make a decision on how to allocate the scarce resource of time.\r\n\r\nWhile this is an extreme example, it is reflective of a common problem in production. Since there are only a certain number of hours in the day, time is a scarce resource. This scarcity limits the amount of total production.\r\n\r\nFigure 2.2a displays a table showing several different combinations of goods that can be harvested in a given week. The table is very logical\u00a0\u2013 if you spend all your time catching\u00a0crabs, you will have no pineapples. Notice that you can produce either all crabs, all pineapples, or a mix of the two.\r\n\r\nAssume you choose to only catch crabs. How many would have to be given up in order to obtain ten pineapples? In this example, only one. This is an important concept; even though our scarce resource is time, we can measure the cost of a\u00a0good, in this case, pineapples, in terms of the foregone good, in this cases crabs.\r\n\r\nThis concept is called the\u00a0<strong>Marginal Opportunity Cost\u00a0<\/strong>of an action. In this case, since you have to give up one\u00a0crab to produce 10 pineapples, the marginal opportunity cost for one pineapple is 1\/10 of a crab.\r\n\r\n[caption id=\"attachment_464\" align=\"alignleft\" width=\"485\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1.jpg\" width=\"485\" height=\"264\" class=\"wp-image-464 \" \/> Figure 2.2a[\/caption]\r\n<p style=\"background: white;vertical-align: baseline;margin: 0cm 0cm 11.25pt 0cm\"><span style=\"color: #1f1f1d\">Notice how the\u00a0marginal cost changes as\u00a0you harvest more pineapples. To produce the next ten pineapples, it costs two crabs, and the next ten costs four. This continues until there are no more crabs to give up. While marginal opportunity cost is not always increasing, it is intuitive to think that the more pineapples you pick, the harder they will be to find, and therefore the more time you will have to give up to harvest\u00a010 more.\u00a0<\/span><\/p>\r\n&nbsp;\r\n<div class=\"textbox key-takeaways\">\r\n<h3 itemprop=\"educationalUse\">Applications<\/h3>\r\n<h2><img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min.jpg\" alt=\"\" width=\"297\" height=\"198\" class=\"wp-image-1969 alignright\" \/>\u00a0Opportunity Cost At University<\/h2>\r\nThe concept of \u201cOpportunity Cost\u201d is not just applicable when you are stranded on an island; in fact, we face opportunity costs every day. Consider the opportunity cost of reading this textbook. Perhaps for the hour you spend reading, you could have made $11 working at a restaurant, scrolled through Facebook, or spent time with friends. By continuing to read, you are forfeiting the opportunity of doing <strong>one<\/strong> of those things. One common fallacy when evaluating opportunity costs is considering all the different ways you could be spending your time. Remember, since you can only be in once place at a time, only the next best option is relevant in your decision making. In our simplified example, we limited our discussion to only two\u00a0options so this fallacy did not interfere.\r\n\r\n<\/div>\r\n&nbsp;\r\n<h1>Production Possibility Frontier<\/h1>\r\nWhile much useful analysis can be conducted with a chart,\u00a0it is often useful to represent our models graphically. <strong>A\u00a0Production Possibility Frontier (PPF)\u00a0<\/strong>is the graphical representation of Figure 2.2a. It represents the\u00a0maximum\u00a0combination of goods that can be produced given available resources and technology. Each point represents one of the combinations from Figure 2.2a. In our example, while we would love to produce 50 pineapples and 50 crabs, this is out of our realm of possible production. In other words, it is not a point on our PPF.\r\n\r\n[caption id=\"attachment_474\" align=\"alignleft\" width=\"464\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2.jpg\" width=\"464\" height=\"366\" class=\"wp-image-474 size-full\" \/> Figure 2.2b[\/caption]\r\n\r\nUsing our terminology from before, each point along\u00a0our PPF (i.e. Point A) is\u00a0<strong>efficient<\/strong>\u00a0(in a one-person world) since there is no\u00a0way to get more pineapples without giving up some crabs and vice-versa. There are no Pareto Improvements in the current situation.\r\n<p style=\"background: white;vertical-align: baseline\"><span style=\"color: #1f1f1d\">If we are inside the PPF (i.e. Point B), we are not fully using our resources. In this case, we can produce more pineapples\u00a0without having to give up any more crabs. This point is\u00a0<strong>inefficient<\/strong>. <\/span><\/p>\r\n<p style=\"background: white;vertical-align: baseline\"><span style=\"color: #1f1f1d\">Points\u00a0outside\u00a0the PPF (i.e. Point C), while preferable, are\u00a0<strong>unattainable<\/strong>\u00a0given constraints in\u00a0resources\u00a0and time.\u00a0<\/span><\/p>\r\n<p style=\"background: white;vertical-align: baseline\"><span style=\"color: #1f1f1d\">Using our analysis of Marginal Opportunity Cost (MC) from before, we see that the Slope (absolute value) of the PPF is the Marginal Cost of the good on\u00a0the horizontal axis. Recall that slope is calculated using rise over run. By calculating the slope from (20,18) to (30,14), we see the\u00a0MC is 4\/10 of a crab for one pineapple (or 4 crabs for 10 pineapples as represented in our chart). As we move down the PPF, the slope and MC increase.<\/span><\/p>\r\n\r\n\r\n[caption id=\"attachment_475\" align=\"alignright\" width=\"362\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2c-1.jpg\" width=\"362\" height=\"284\" class=\"wp-image-475 \" \/> Figure 2.2c[\/caption]\r\n\r\nGiven our scarce resources and time, we can efficiently produce any point along the PPF. Now, we face the same problem as before. How do we determine which bundle to choose? Is it better\u00a0to produce 50 pineapples and 0 crabs, 21 crabs and 0 pineapples, or a mix of the two? This depends entirely on\u00a0<strong>preferences<\/strong>.\u00a0Perhaps you are allergic to crabs and they provide you no value, or maybe you have a desired ratio of crabs to pineapples. Since the bundles along the PPF are all efficient, we cannot pass judgment on which is best.\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n<div class=\"bcc-box bcc-success\">\r\n<h3 itemprop=\"educationalUse\" style=\"text-align: center\">Applications<\/h3>\r\n<h2>The Island Example - Brexit<\/h2>\r\n[caption id=\"attachment_1970\" align=\"alignnone\" width=\"563\"]<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011.jpg\" alt=\"\" width=\"563\" height=\"375\" class=\"wp-image-1970\" \/> Former British Prime Minister David Cameron defending the 'stay' side of the Brexit debate. (Credit: World Economic Forum\/ Flickr\/ CC-BY-SA-2.0)[\/caption]\r\n\r\nWhile our discussion so far has referred to a deserted island\u00a0scenario, the same concepts are easily relatable to a country\u2019s\u00a0production. On a much\u00a0larger scale, countries face trade-offs in production. The island situation can be likened to a country with a policy\u00a0of\u00a0<strong>autarky<\/strong> \u2013 a state of economic\u00a0independence\u00a0or self-sufficiency. The United Kingdom's decision to leave the European Union (commonly known as Brexit) metaphorically makes it more of an island. The country will have to face more trade-offs with the goods it can produce. As we will see in the next section, trade can reduce these trade-offs and allow countries to reach points outside their\u00a0PPF.\r\n\r\n&nbsp;\r\n\r\n<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Brexit.png\" alt=\"Brexit\" width=\"167\" height=\"167\" class=\"wp-image-467 aligncenter\" \/>\r\n<h4 style=\"text-align: center\"><a href=\"http:\/\/www.economist.com\/news\/britain\/21695544-it-would-be-hard-britain-negotiate-good-trade-deals-post-brexit-unfavourable-trade-winds\">Click to Learn More<\/a><\/h4>\r\n&nbsp;\r\n\r\n<\/div>\r\n<h1>Shifting a PPF<\/h1>\r\nAs we will see in Topic 2.3, trade allows countries, individuals, or firms to reach points outside their PPF.\u00a0In addition to trade, there are some other factors that shift a countries PPF, allowing an change\u00a0in attainable output. These factors include:\r\n<ul>\r\n \t<li><strong>A Shift in Technology -\u00a0<\/strong>If you were to invent\u00a0a computer system that showed the location of crabs and pineapples on the island, you would be able to produce more of both goods, shifting the PPF outward.<\/li>\r\n \t<li><strong>More Education or Training<\/strong>\u00a0-\u00a0If you were to become more skilled at harvesting pineapples or crabs, your attainable output would increase, shifting the PPF outward.<\/li>\r\n \t<li><strong>Natural Disaster\u00a0<\/strong>- If disaster strikes, and pineapples or crabs become less plentiful, your attainable output would decrease, shifting the PPF inward.<\/li>\r\n<\/ul>\r\nThese are not the only factors that could shift the PPF, but they are the most common. What is important to recognize is that a PPF represents what is attainable, and that is subject to change.\r\n<div class=\"textbox\">\r\n<h1>Glossary<\/h1>\r\n<dl class=\"definition\">\r\n \t<dt><b>Autarky<\/b><\/dt>\r\n \t<dd id=\"fs-id8773128\"><span>A state of economic independence or self-sufficiency.<\/span><\/dd>\r\n<\/dl>\r\n<dl id=\"fs-id1166931932929\" class=\"definition\">\r\n \t<dt><b>Economic Model<\/b><\/dt>\r\n \t<dd id=\"fs-id8773128\"><span>A simplified framework that is designed to illustrate complex processes.<\/span><\/dd>\r\n<\/dl>\r\n<dl id=\"fs-id1166931932929\" class=\"definition\">\r\n \t<dt><b>Marginal Opportunity Cost<\/b><\/dt>\r\n \t<dd id=\"fs-id8773128\">A solution that is ethically or legally just and fair, but may not be wholly satisfactory to any or all the involved parties.<\/dd>\r\n<\/dl>\r\n<dl id=\"fs-idp75697120\" class=\"definition\">\r\n \t<dd><\/dd>\r\n \t<dt><strong>Preferences<\/strong><\/dt>\r\n \t<dd id=\"fs-idm10827520\"><span>The ordering of alternatives based on their relative utility, a process which results in an optimal choice.<\/span><\/dd>\r\n<\/dl>\r\n<dl class=\"definition\">\r\n \t<dt><\/dt>\r\n \t<dt><strong>Production Possibilities Frontier (PPF)<\/strong><\/dt>\r\n \t<dd id=\"fs-idp185853264\">A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.<\/dd>\r\n<\/dl>\r\n<\/div>\r\n<dl class=\"definition\">\r\n \t<dt><\/dt>\r\n<\/dl>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3 itemprop=\"educationalUse\">Exercises 2.2<\/h3>\r\n<strong>1.<\/strong>\u00a0Consider the PPF diagram below.\r\n\r\n<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM.png\" alt=\"screen-shot-2016-12-28-at-7-30-08-pm\" width=\"408\" height=\"258\" class=\"alignnone size-full wp-image-933\" \/>\r\n\r\nGiven the PPF illustrated, what is the opportunity cost of moving from B to A?\r\n\r\na) 5 coconuts.\r\nb) 10 fish.\r\nc) 5\/10 fish\r\nd) 10\/5 coconuts.\r\n\r\n&nbsp;\r\n<p class=\"p1\"><span class=\"s1\">The following TWO questions refer the diagram below, which illustrates the PPF for a producer of two goods, x and y.<\/span><\/p>\r\n<p class=\"p1\"><img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.29.35-PM.png\" alt=\"screen-shot-2016-12-28-at-7-29-35-pm\" width=\"239\" height=\"195\" class=\"alignnone wp-image-934\" \/><\/p>\r\n<strong>2.<\/strong>\u00a0Which of the following statements is TRUE?\r\n\r\nI. \u00a0 \u00a0The marginal cost of producing x is higher at high levels of x than it is at low levels of x.\r\nII. \u00a0 The marginal cost of producing y is higher at high levels of y than it is at low levels of y.\r\nIII. \u00a0The marginal cost of producing both x and y is constant in the level of production.\r\n\r\na) I only.\r\nb) II only.\r\nc) III only.\r\nd) I and II only.\r\n\r\n<strong>3.\u00a0<\/strong>If this economy is operating at point A, which of the following statements is TRUE?\r\n\r\nI. \u00a0 The opportunity cost of producing more x is zero.\r\nII. \u00a0The opportunity cost of producing more y is zero.\r\nIII. Point A is inefficient.\r\n\r\na) III only.\r\nb) I and II only.\r\nc) I and III only.\r\nd) I, II, and III.\r\n\r\nThe following TWO questions refer to the PPF diagram below.\r\n\r\n<img src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.33.38-PM.png\" alt=\"screen-shot-2016-12-28-at-7-33-38-pm\" width=\"298\" height=\"245\" class=\"alignnone wp-image-935\" \/>\r\n\r\n<strong>4.<\/strong>\u00a0What is the MARGINAL cost of producing good <strong>y<\/strong>?\r\n\r\na) 1\/4 of a unit of <strong>x<\/strong>.\r\nb) 1\/4 of a unit of <strong>y<\/strong>.\r\nc) 4 units of <strong>x<\/strong>.\r\nd) 4 units of <strong>y<\/strong>.\r\n\r\n&nbsp;\r\n\r\n<strong>5.<\/strong>\u00a0What is the cost of producing FOUR units of good <strong>y<\/strong>?\r\n\r\na) 16 units of <strong>x<\/strong>.\r\nb) 4 units of <strong>x<\/strong>.\r\nc) 1\/4 of a unit of <strong>x<\/strong>.\r\nd) 40 units of <strong>x.<\/strong>\r\n\r\n&nbsp;\r\n\r\n<strong>6.<\/strong>\u00a0Consider a PPF drawn with x on the horizontal axis and y on the vertical axis. Which of the following concepts can be used to explain why this production possibility frontier could be flat at relatively lows levels of x and steep at relatively high levels of x?\r\n\r\na) Increasing marginal costs.\r\nb) Scarcity\r\nc) Sunk costs.\r\nd) Trade\r\n\r\n<strong>7.<\/strong>\u00a0Which of the following concepts can be used to explain why production possibility frontiers slope downwards.\r\n\r\na) Scarcity\r\nb) Sunk costs.\r\nc) Trade\r\nd) Increasing marginal costs.\r\n\r\n<\/div>\r\n&nbsp;","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3 itemprop=\"educationalUse\">Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul>\n<li>Understand how economic models work to simplify complex problems<\/li>\n<li>Define\u00a0opportunity cost and apply it to daily situations<\/li>\n<li>Understand how to\u00a0graph and analyze a PPF<\/li>\n<li>Explain how preferences influence our production decisions<\/li>\n<\/ul>\n<\/div>\n<figure id=\"attachment_1966\" aria-describedby=\"caption-attachment-1966\" style=\"width: 322px\" class=\"wp-caption alignleft\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped.jpg\" alt=\"\" width=\"322\" height=\"215\" class=\"wp-image-1966\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped.jpg 800w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped-300x200.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped-768x512.jpg 768w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped-65x43.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped-225x150.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Landscape_view_of_wildfire_near_Highway_63_in_south_Fort_McMurray_cropped-350x233.jpg 350w\" sizes=\"auto, (max-width: 322px) 100vw, 322px\" \/><figcaption id=\"caption-attachment-1966\" class=\"wp-caption-text\">The fires in Fort McMurray were a natural disaster that could not have been anticipated. The devastation severely impacted the economy of Alberta, not to mention the lives of many of its habitats. Although there are many unpredictable aspects to our world, economics develops a simplified framework to make analysis despite these unknowns. (Credit: DarrenRD\/ Wikimedia Commons\/\u00a0CC-BY-SA-4.0)<\/figcaption><\/figure>\n<p>Think of all the different variables that can impact trade. A country\u2019s interest rate influences the flow of financial capital; its exchange rate encourages or discourages the purchase of goods and services. The weather can impact the production of goods, and politics can create tension between countries. Many of these examples are macro issues that will impact our micro analysis. How can we navigate such complex economic issues to make normative judgments? The answer is economic models.<\/p>\n<p><strong>An economic model<\/strong>\u00a0is a simplified framework that is designed to illustrate complex processes. Oftentimes in introductory Microeconomics, these models seem oversimplified because\u00a0they hold certain variables constant. While one should remain aware\u00a0of this, these models are still useful. Holding some information constant can help us understand a concept without being overwhelmed by a vast number of influencing\u00a0factors. Economic models are the building blocks of most modern economic theory. By understanding these models, we\u00a0can develop a mindset to understand the economic world.<\/p>\n<h1 style=\"text-align: left\">Model of Production<\/h1>\n<figure id=\"attachment_1968\" aria-describedby=\"caption-attachment-1968\" style=\"width: 343px\" class=\"wp-caption alignright\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/pablo-garcia-saldana-36212.jpg\" alt=\"\" width=\"343\" height=\"341\" class=\"wp-image-1968\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/pablo-garcia-saldana-36212-150x150.jpg 150w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/pablo-garcia-saldana-36212-65x65.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/pablo-garcia-saldana-36212-225x225.jpg 225w\" sizes=\"auto, (max-width: 343px) 100vw, 343px\" \/><figcaption id=\"caption-attachment-1968\" class=\"wp-caption-text\">If you were stranded on an island with only pineapples\u00a0and crabs, how much of each would you produce? Would this change depending on how difficult each one was to harvest? (Credit:\u00a0Pablo Garcia Salda\u00f1a\/Unsplash)<\/figcaption><\/figure>\n<p>An economic model is only useful when we understand its underlying assumptions. For this model,\u00a0imagine the following scenario:<\/p>\n<p>You are stranded on a tropical island alone. On this island, there are only two foods: pineapples and crabs. In other words, you face a trade-off: any time you spend harvesting pineapples\u00a0is time that cannot be spent looking\u00a0for crabs. You are forced to make a decision on how to allocate the scarce resource of time.<\/p>\n<p>While this is an extreme example, it is reflective of a common problem in production. Since there are only a certain number of hours in the day, time is a scarce resource. This scarcity limits the amount of total production.<\/p>\n<p>Figure 2.2a displays a table showing several different combinations of goods that can be harvested in a given week. The table is very logical\u00a0\u2013 if you spend all your time catching\u00a0crabs, you will have no pineapples. Notice that you can produce either all crabs, all pineapples, or a mix of the two.<\/p>\n<p>Assume you choose to only catch crabs. How many would have to be given up in order to obtain ten pineapples? In this example, only one. This is an important concept; even though our scarce resource is time, we can measure the cost of a\u00a0good, in this case, pineapples, in terms of the foregone good, in this cases crabs.<\/p>\n<p>This concept is called the\u00a0<strong>Marginal Opportunity Cost\u00a0<\/strong>of an action. In this case, since you have to give up one\u00a0crab to produce 10 pineapples, the marginal opportunity cost for one pineapple is 1\/10 of a crab.<\/p>\n<figure id=\"attachment_464\" aria-describedby=\"caption-attachment-464\" style=\"width: 485px\" class=\"wp-caption alignleft\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1.jpg\" width=\"485\" height=\"264\" class=\"wp-image-464\" alt=\"image\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1.jpg 6708w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1-300x163.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1-768x417.jpg 768w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1-1024x555.jpg 1024w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1-65x35.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1-225x122.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2a-arrows-1-350x190.jpg 350w\" sizes=\"auto, (max-width: 485px) 100vw, 485px\" \/><figcaption id=\"caption-attachment-464\" class=\"wp-caption-text\">Figure 2.2a<\/figcaption><\/figure>\n<p style=\"background: white;vertical-align: baseline;margin: 0cm 0cm 11.25pt 0cm\"><span style=\"color: #1f1f1d\">Notice how the\u00a0marginal cost changes as\u00a0you harvest more pineapples. To produce the next ten pineapples, it costs two crabs, and the next ten costs four. This continues until there are no more crabs to give up. While marginal opportunity cost is not always increasing, it is intuitive to think that the more pineapples you pick, the harder they will be to find, and therefore the more time you will have to give up to harvest\u00a010 more.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<div class=\"textbox key-takeaways\">\n<h3 itemprop=\"educationalUse\">Applications<\/h3>\n<h2><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min.jpg\" alt=\"\" width=\"297\" height=\"198\" class=\"wp-image-1969 alignright\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min.jpg 5184w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min-300x200.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min-768x512.jpg 768w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min-1024x683.jpg 1024w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min-65x43.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min-225x150.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/bonnie-kittle-186235-min-350x233.jpg 350w\" sizes=\"auto, (max-width: 297px) 100vw, 297px\" \/>\u00a0Opportunity Cost At University<\/h2>\n<p>The concept of \u201cOpportunity Cost\u201d is not just applicable when you are stranded on an island; in fact, we face opportunity costs every day. Consider the opportunity cost of reading this textbook. Perhaps for the hour you spend reading, you could have made $11 working at a restaurant, scrolled through Facebook, or spent time with friends. By continuing to read, you are forfeiting the opportunity of doing <strong>one<\/strong> of those things. One common fallacy when evaluating opportunity costs is considering all the different ways you could be spending your time. Remember, since you can only be in once place at a time, only the next best option is relevant in your decision making. In our simplified example, we limited our discussion to only two\u00a0options so this fallacy did not interfere.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<h1>Production Possibility Frontier<\/h1>\n<p>While much useful analysis can be conducted with a chart,\u00a0it is often useful to represent our models graphically. <strong>A\u00a0Production Possibility Frontier (PPF)\u00a0<\/strong>is the graphical representation of Figure 2.2a. It represents the\u00a0maximum\u00a0combination of goods that can be produced given available resources and technology. Each point represents one of the combinations from Figure 2.2a. In our example, while we would love to produce 50 pineapples and 50 crabs, this is out of our realm of possible production. In other words, it is not a point on our PPF.<\/p>\n<figure id=\"attachment_474\" aria-describedby=\"caption-attachment-474\" style=\"width: 464px\" class=\"wp-caption alignleft\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2.jpg\" width=\"464\" height=\"366\" class=\"wp-image-474 size-full\" alt=\"image\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2.jpg 464w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2-300x237.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2-65x51.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2-225x177.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2b-2-350x276.jpg 350w\" sizes=\"auto, (max-width: 464px) 100vw, 464px\" \/><figcaption id=\"caption-attachment-474\" class=\"wp-caption-text\">Figure 2.2b<\/figcaption><\/figure>\n<p>Using our terminology from before, each point along\u00a0our PPF (i.e. Point A) is\u00a0<strong>efficient<\/strong>\u00a0(in a one-person world) since there is no\u00a0way to get more pineapples without giving up some crabs and vice-versa. There are no Pareto Improvements in the current situation.<\/p>\n<p style=\"background: white;vertical-align: baseline\"><span style=\"color: #1f1f1d\">If we are inside the PPF (i.e. Point B), we are not fully using our resources. In this case, we can produce more pineapples\u00a0without having to give up any more crabs. This point is\u00a0<strong>inefficient<\/strong>. <\/span><\/p>\n<p style=\"background: white;vertical-align: baseline\"><span style=\"color: #1f1f1d\">Points\u00a0outside\u00a0the PPF (i.e. Point C), while preferable, are\u00a0<strong>unattainable<\/strong>\u00a0given constraints in\u00a0resources\u00a0and time.\u00a0<\/span><\/p>\n<p style=\"background: white;vertical-align: baseline\"><span style=\"color: #1f1f1d\">Using our analysis of Marginal Opportunity Cost (MC) from before, we see that the Slope (absolute value) of the PPF is the Marginal Cost of the good on\u00a0the horizontal axis. Recall that slope is calculated using rise over run. By calculating the slope from (20,18) to (30,14), we see the\u00a0MC is 4\/10 of a crab for one pineapple (or 4 crabs for 10 pineapples as represented in our chart). As we move down the PPF, the slope and MC increase.<\/span><\/p>\n<figure id=\"attachment_475\" aria-describedby=\"caption-attachment-475\" style=\"width: 362px\" class=\"wp-caption alignright\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2c-1.jpg\" width=\"362\" height=\"284\" class=\"wp-image-475\" alt=\"image\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2c-1-65x51.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2c-1-225x177.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Figure-2.2c-1-350x276.jpg 350w\" sizes=\"auto, (max-width: 362px) 100vw, 362px\" \/><figcaption id=\"caption-attachment-475\" class=\"wp-caption-text\">Figure 2.2c<\/figcaption><\/figure>\n<p>Given our scarce resources and time, we can efficiently produce any point along the PPF. Now, we face the same problem as before. How do we determine which bundle to choose? Is it better\u00a0to produce 50 pineapples and 0 crabs, 21 crabs and 0 pineapples, or a mix of the two? This depends entirely on\u00a0<strong>preferences<\/strong>.\u00a0Perhaps you are allergic to crabs and they provide you no value, or maybe you have a desired ratio of crabs to pineapples. Since the bundles along the PPF are all efficient, we cannot pass judgment on which is best.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<div class=\"bcc-box bcc-success\">\n<h3 itemprop=\"educationalUse\" style=\"text-align: center\">Applications<\/h3>\n<h2>The Island Example &#8211; Brexit<\/h2>\n<figure id=\"attachment_1970\" aria-describedby=\"caption-attachment-1970\" style=\"width: 563px\" class=\"wp-caption alignnone\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011.jpg\" alt=\"\" width=\"563\" height=\"375\" class=\"wp-image-1970\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011.jpg 800w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011-300x200.jpg 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011-768x512.jpg 768w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011-65x43.jpg 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011-225x150.jpg 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/800px-David_Cameron_28_January_2011-350x233.jpg 350w\" sizes=\"auto, (max-width: 563px) 100vw, 563px\" \/><figcaption id=\"caption-attachment-1970\" class=\"wp-caption-text\">Former British Prime Minister David Cameron defending the &#8216;stay&#8217; side of the Brexit debate. (Credit: World Economic Forum\/ Flickr\/ CC-BY-SA-2.0)<\/figcaption><\/figure>\n<p>While our discussion so far has referred to a deserted island\u00a0scenario, the same concepts are easily relatable to a country\u2019s\u00a0production. On a much\u00a0larger scale, countries face trade-offs in production. The island situation can be likened to a country with a policy\u00a0of\u00a0<strong>autarky<\/strong> \u2013 a state of economic\u00a0independence\u00a0or self-sufficiency. The United Kingdom&#8217;s decision to leave the European Union (commonly known as Brexit) metaphorically makes it more of an island. The country will have to face more trade-offs with the goods it can produce. As we will see in the next section, trade can reduce these trade-offs and allow countries to reach points outside their\u00a0PPF.<\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Brexit.png\" alt=\"Brexit\" width=\"167\" height=\"167\" class=\"wp-image-467 aligncenter\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Brexit.png 200w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Brexit-150x150.png 150w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Brexit-65x65.png 65w\" sizes=\"auto, (max-width: 167px) 100vw, 167px\" \/><\/p>\n<h4 style=\"text-align: center\"><a href=\"http:\/\/www.economist.com\/news\/britain\/21695544-it-would-be-hard-britain-negotiate-good-trade-deals-post-brexit-unfavourable-trade-winds\">Click to Learn More<\/a><\/h4>\n<p>&nbsp;<\/p>\n<\/div>\n<h1>Shifting a PPF<\/h1>\n<p>As we will see in Topic 2.3, trade allows countries, individuals, or firms to reach points outside their PPF.\u00a0In addition to trade, there are some other factors that shift a countries PPF, allowing an change\u00a0in attainable output. These factors include:<\/p>\n<ul>\n<li><strong>A Shift in Technology &#8211;\u00a0<\/strong>If you were to invent\u00a0a computer system that showed the location of crabs and pineapples on the island, you would be able to produce more of both goods, shifting the PPF outward.<\/li>\n<li><strong>More Education or Training<\/strong>\u00a0&#8211;\u00a0If you were to become more skilled at harvesting pineapples or crabs, your attainable output would increase, shifting the PPF outward.<\/li>\n<li><strong>Natural Disaster\u00a0<\/strong>&#8211; If disaster strikes, and pineapples or crabs become less plentiful, your attainable output would decrease, shifting the PPF inward.<\/li>\n<\/ul>\n<p>These are not the only factors that could shift the PPF, but they are the most common. What is important to recognize is that a PPF represents what is attainable, and that is subject to change.<\/p>\n<div class=\"textbox\">\n<h1>Glossary<\/h1>\n<dl class=\"definition\">\n<dt><b>Autarky<\/b><\/dt>\n<dd id=\"fs-id8773128\"><span>A state of economic independence or self-sufficiency.<\/span><\/dd>\n<\/dl>\n<dl id=\"fs-id1166931932929\" class=\"definition\">\n<dt><b>Economic Model<\/b><\/dt>\n<dd id=\"fs-id8773128\"><span>A simplified framework that is designed to illustrate complex processes.<\/span><\/dd>\n<\/dl>\n<dl id=\"fs-id1166931932929\" class=\"definition\">\n<dt><b>Marginal Opportunity Cost<\/b><\/dt>\n<dd id=\"fs-id8773128\">A solution that is ethically or legally just and fair, but may not be wholly satisfactory to any or all the involved parties.<\/dd>\n<\/dl>\n<dl id=\"fs-idp75697120\" class=\"definition\">\n<dd><\/dd>\n<dt><strong>Preferences<\/strong><\/dt>\n<dd id=\"fs-idm10827520\"><span>The ordering of alternatives based on their relative utility, a process which results in an optimal choice.<\/span><\/dd>\n<\/dl>\n<dl class=\"definition\">\n<dt><\/dt>\n<dt><strong>Production Possibilities Frontier (PPF)<\/strong><\/dt>\n<dd id=\"fs-idp185853264\">A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.<\/dd>\n<\/dl>\n<\/div>\n<dl class=\"definition\">\n<dt><\/dt>\n<\/dl>\n<div class=\"bcc-box bcc-info\">\n<h3 itemprop=\"educationalUse\">Exercises 2.2<\/h3>\n<p><strong>1.<\/strong>\u00a0Consider the PPF diagram below.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM.png\" alt=\"screen-shot-2016-12-28-at-7-30-08-pm\" width=\"408\" height=\"258\" class=\"alignnone size-full wp-image-933\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM.png 408w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM-300x190.png 300w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM-65x41.png 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM-225x142.png 225w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.30.08-PM-350x221.png 350w\" sizes=\"auto, (max-width: 408px) 100vw, 408px\" \/><\/p>\n<p>Given the PPF illustrated, what is the opportunity cost of moving from B to A?<\/p>\n<p>a) 5 coconuts.<br \/>\nb) 10 fish.<br \/>\nc) 5\/10 fish<br \/>\nd) 10\/5 coconuts.<\/p>\n<p>&nbsp;<\/p>\n<p class=\"p1\"><span class=\"s1\">The following TWO questions refer the diagram below, which illustrates the PPF for a producer of two goods, x and y.<\/span><\/p>\n<p class=\"p1\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.29.35-PM.png\" alt=\"screen-shot-2016-12-28-at-7-29-35-pm\" width=\"239\" height=\"195\" class=\"alignnone wp-image-934\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.29.35-PM.png 234w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.29.35-PM-65x53.png 65w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.29.35-PM-225x184.png 225w\" sizes=\"auto, (max-width: 239px) 100vw, 239px\" \/><\/p>\n<p><strong>2.<\/strong>\u00a0Which of the following statements is TRUE?<\/p>\n<p>I. \u00a0 \u00a0The marginal cost of producing x is higher at high levels of x than it is at low levels of x.<br \/>\nII. \u00a0 The marginal cost of producing y is higher at high levels of y than it is at low levels of y.<br \/>\nIII. \u00a0The marginal cost of producing both x and y is constant in the level of production.<\/p>\n<p>a) I only.<br \/>\nb) II only.<br \/>\nc) III only.<br \/>\nd) I and II only.<\/p>\n<p><strong>3.\u00a0<\/strong>If this economy is operating at point A, which of the following statements is TRUE?<\/p>\n<p>I. \u00a0 The opportunity cost of producing more x is zero.<br \/>\nII. \u00a0The opportunity cost of producing more y is zero.<br \/>\nIII. Point A is inefficient.<\/p>\n<p>a) III only.<br \/>\nb) I and II only.<br \/>\nc) I and III only.<br \/>\nd) I, II, and III.<\/p>\n<p>The following TWO questions refer to the PPF diagram below.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.33.38-PM.png\" alt=\"screen-shot-2016-12-28-at-7-33-38-pm\" width=\"298\" height=\"245\" class=\"alignnone wp-image-935\" srcset=\"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.33.38-PM.png 214w, https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-content\/uploads\/sites\/58\/2016\/08\/Screen-Shot-2016-12-28-at-7.33.38-PM-65x53.png 65w\" sizes=\"auto, (max-width: 298px) 100vw, 298px\" \/><\/p>\n<p><strong>4.<\/strong>\u00a0What is the MARGINAL cost of producing good <strong>y<\/strong>?<\/p>\n<p>a) 1\/4 of a unit of <strong>x<\/strong>.<br \/>\nb) 1\/4 of a unit of <strong>y<\/strong>.<br \/>\nc) 4 units of <strong>x<\/strong>.<br \/>\nd) 4 units of <strong>y<\/strong>.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>5.<\/strong>\u00a0What is the cost of producing FOUR units of good <strong>y<\/strong>?<\/p>\n<p>a) 16 units of <strong>x<\/strong>.<br \/>\nb) 4 units of <strong>x<\/strong>.<br \/>\nc) 1\/4 of a unit of <strong>x<\/strong>.<br \/>\nd) 40 units of <strong>x.<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p><strong>6.<\/strong>\u00a0Consider a PPF drawn with x on the horizontal axis and y on the vertical axis. Which of the following concepts can be used to explain why this production possibility frontier could be flat at relatively lows levels of x and steep at relatively high levels of x?<\/p>\n<p>a) Increasing marginal costs.<br \/>\nb) Scarcity<br \/>\nc) Sunk costs.<br \/>\nd) Trade<\/p>\n<p><strong>7.<\/strong>\u00a0Which of the following concepts can be used to explain why production possibility frontiers slope downwards.<\/p>\n<p>a) Scarcity<br \/>\nb) Sunk costs.<br \/>\nc) Trade<br \/>\nd) Increasing marginal costs.<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n","protected":false},"author":58,"menu_order":3,"comment_status":"closed","ping_status":"closed","template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-375","chapter","type-chapter","status-publish","hentry"],"part":25,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/375","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/users\/58"}],"replies":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/comments?post=375"}],"version-history":[{"count":25,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/375\/revisions"}],"predecessor-version":[{"id":1967,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/375\/revisions\/1967"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/parts\/25"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/375\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/media?parent=375"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapter-type?post=375"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/contributor?post=375"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/license?post=375"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}