1/ Refer the the corn and oats economy analyzed in your course pack and in class

Question

1/ Refer the the corn and oats economy analyzed in your course pack and in class today (2A). The Production Possibility Frontier boundary should trace out the maximum amount of oats that could be produced for every given quantity of corn. The accompanying graph - which fails this criterion - shows the combinations of corn and oats that could be produced if, starting with all fields planted entirely in corn, producers moved acreage out of corn and into oats by first using field A then field B, then field C. The graph shows that if resources were allocated in that manner, then the first 100 bushels of oats required the sacrifice of 100 bushels of corn. How could a re-allocation of resources to minimize the opportunity cost of those first 100 bushels of oats?

A. Use Field B instead of Field A to grow the oats

B. Use Field C instead of Field A to grow the oats

C. Use parts of all three fields to grow the oats

D. Answers A and B yield equivalent results

A. Use Field B instead of Field A to grow the oats

B. Use Field C instead of Field A to grow the oats

C. Use parts of all three fields to grow the oats

D. Answers A and B yield equivalent results

Explanation / Answer

Since, it is given that the opportunity cost of producing 100 bushels of oats is 100 bushels of corn. This implies the opportunity cost of producing 1 bushel of oat is equal to 1 bushel of corn.

Further, since the PPF curve is convex to the origin, therefore, as one move leftward along the curve, the opportunity cost of producing 1 bushel of oats will keep on decreasing. The amount of corn given up for each additional bushel of oats is decreasing, it implies that as one reallocate the productive factors, a stage will occure when no longer reallocation of resources will minimize the opportunity cost.

From the graph it appears that the minimization of opportunity cost of those first 100 bushels of oat will occur when Field B instead of Field A is chosen.

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