In Young Suh

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ECON1101 Hand-In Assignment 1 (due Week 3)
Q1a.
Working Out:
Opportunity Cost of Coffee:
Newland = (1/20)/(1/10) = 1/2 For every 2 units of coffee produced, 1 unit of nut is not produced
Oldland = (1/30)/(1/20) = 2/3 For every 3 units of coffee produced, 2 units of nuts are not produced

Answer:
(a)

The opportunity cost of producing one more unit of nuts in Newland is 2 units of coffee

Q1b.
Answer:
(c)

The opportunity cost of producing one good increases as more is produced of that good

Q2.
a) The definition of opportunity cost of an action is the cost value of the next best alternative forgone.
The slope of the PPC shows opportunity cost of producing one unit of the product specified on the
x-axis as it the slope (gradient) defines the change in the products on the y-axis over the change
in the product on the x-axis. Thus the slope shows the amount of products on the y-axis not
produced per unit of product on the x-axis produced, i.e. for every unit specified on the x-axis
produced.
b) Since a bow shaped (concave to the origin) PPC shows a graph with increasingly negative
gradient (i.e. the gradient of the PPC becomes more negative for increasing values on the xaxis,), this shows an increasing opportunity cost of the good that is being produced. Thus the
principle of increasing opportunity costs is reflected by the bow shaped PPC as an increase in
production of one good shows an increase in opportunity cost to produce the additional good.
c) Taking into consideration the principle of increasing opportunity cost, to increase the production of
any good, an economy will first employ the resources with the lowest opportunity cost and once
these are used up, turn to resources with higher cost. For an economy with many agents for
which each agent will have different efficiency in producing the two goods, each of their
opportunity cost of producing one good will differ. Thus when employing labour with lowest
opportunity costs first to highest opportunity cost last, the Production Possibility Curve (PPC) will
have a gradient which has increasingly negative slope and hence a bow shaped PPC.

In Young Suh
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Q3.
a)
Cloth
Wine
Time for one metre of Cloth
Time for one litre of Wine

Oliver
2 m/hr
4 L/hr
0.5 hr/m
0.25 hr/L

Nellie
1 m/hr
5 L/hr
1 hr/m
0.2 hr/L

b) Since Oliver is able to produce 2 metres of cloth every hour whilst Nellie is only able to produce
one metre every hour, Oliver has an absolute advantage in producing cloth over Nellie.
For comparative advantage in producing cloth, opportunity costs of cloth are compared.
Opportunity cost for Oliver to produce cloth = 4/2 = 2
i.e. producing 1m of cloth costs 2L of wine
Opportunity cost for Nellie to produce cloth = 5/1 = 5
i.e. producing 1m of cloth costs 5L of wine
Thus Oliver has a lower opportunity cost of producing cloth and therefore Oliver has a
comparative advantage in producing cloth over Nellie.
c) If Nellie decides to specialise such that there are gains from specialisation, Nellie should
specialise in producing wine as she is able to produce more wine than Oliver in a given amount of
time, i.e. Nellie has a comparative advantage over Oliver in producing wine as her opportunity
cost of producing wine is lower.

Q4.
a) PPC, Production Possibility Curve, is a curve that represents all the possible combinations of
goods that can be produced with the available resources.

b)