Table 1.2 Pants or Shorts Production Possibilities APPLYING YOUR LEARNING 1.3 ANSWERS Table 1.2 Pants or Shorts Production Possibilities

Q1. What is the opportunity cost of making 500 pairs of pants? 400 300 200 100 Shorts 250 450 600 720 800 When the firm makes 500 pairs of pants they have used up all their resources producing the pants so the quantity of shorts produced is zero.

Q2. What is the opportunity cost of making 250 pairs of shorts? Pants 500 400 300 200 100 Shorts 250 450 600 720 800 To make 250 pairs of shorts the production of shorts goes from 0 to 250. This leads to a reduction in resources available for pants and the quantity of pants declines from 500 to 400. So the loss of production or opportunity cost is 100 pairs of pants.

Q3 What happens to the opportunity cost, if you increase the production of shorts from 250 to 450? Pants 500 400 300 200 100 Shorts 250 450 600 720 800 If the production of shorts rises from 250 to 450, the production of shorts declines an additional 100 pants as production falls to 300 pants.

Q4. What is the opportunity cost of 200 pairs of pants? 500 400 300 200 100 Shorts 250 450 600 720 800 If no pants are produced 800 pairs of shorts can be produced. If 200 pairs of pants are produced then the production of shorts falls to 600. Thus the opportunity cost is 200 pairs of shorts.

Q5. What factors would influence your decision about which combination of shorts and pants to produce? The factors would include How easy it would be to transfer resources between production methods The current and future demand for the two products The level of profit made by the two products

Plot your production schedule on a graph showing a production possibilities frontier. Pants 500 400 300 200 100 200 300 400 500 600 700 800 Shorts