Which Of The Following Is An Illustration Of The Law Of Increasing Opportunity Costs?
- Marvin Harvey
Which of the following is an illustration of the law of increasing opportunity costs? As more cars are produced, the opportunity cost of each additional car is greater than for the preceding unit.
What is law of increasing opportunity cost?
Transcript: – Below is the full transcript of this video presentation. It has not been edited for readability, and there may be slight differences between the text and the video. Our final lesson focuses on the shape of the frontier line. Up to this point we’ve graphed the PPF as a straight line.
- However, a straight line doesn’t best reflect how the real economy uses resources to produce goods.
- For this reason, the frontier is usually drawn as a curved line that is concave to the origin.
- This curved line illustrates our fifth and final lesson.
- Lesson 5: The law of increasing opportunity cost: As you increase the production of one good, the opportunity cost to produce the additional good will increase.
First, remember that opportunity cost is the value of the next-best alternative when a decision is made; it’s what is given up. So let’s compare straight and curved frontier lines to better understand what is more likely to happen when production changes.
Here’s the straight frontier line again. It shows that Econ Isle can produce a maximum of 12 gadgets and 6 widgets or any other combination along the line. At this point, Econ Isle can produce 12 gadgets and 0 widgets. This point shows widget production increased by 2, and this by 2 more, and this by 2 more, indicating all widgets and no gadgets.
So along the straight line, each time Econ Isle increases widget production by 2, it loses the opportunity to produce 4 gadgets. This straight frontier line indicates a constant opportunity cost. In reality, however, opportunity cost doesn’t remain constant.
As the law says, as you increase the production of one good, the opportunity cost to produce the additional good increases. If Econ Isle transitions from widget production to gadget production, it must give up an increasing number of widgets to produce the same number of gadgets. In other words, the more gadgets Econ Isle decides to produce, the greater its opportunity cost in terms of widgets.
If Econ Isle’s production moved in the opposite direction, from all gadgets to all widgets, the law would still hold: As you increase the production of one good, the opportunity cost to produce the additional good increases. Why does this happen? Well, some resources are better suited for some tasks than others.
- For example, many Econ Isle workers are likely very productive gadget makers.
- In the transition to widget production, workers would likely need training and time to develop the skills required to be as productive at making widgets as making gadgets.
- As the economy transitions from gadgets to widgets, the gadget workers best suited to widget production would transition first, then the workers less suited, and finally the workers not at all well suited to widget production.
Here’s where the curved frontier line comes in. It shows that opportunity cost varies along the frontier. Let’s increase widget production in increments of 2 again until only widgets and no gadgets are produced. But this time we’ll consider opportunity cost that varies along the frontier.
This point remains the same. At this point, Econ Isle can produce 12 units of gadgets and 0 widgets. Here’s widget production increased by 2. At this point, Econ Isle can produce 10 gadgets and 2 widgets. It loses the opportunity to produce 2 gadgets. In other words, the opportunity cost of producing 2 widgets is 2 gadgets.
Here’s widget production increased by another 2. At this point, if Econ Isle produces 6 gadgets, it can produce only 4 widgets, so it loses the opportunity to produce 4 gadgets. In other words, the opportunity cost of producing 2 widgets is now 4 gadgets.
Finally, increasing by another 2, Econ Isle can produce 0 gadgets and 6 widgets. It loses the opportunity to produce 6 gadgets. In other words, the opportunity cost of producing 2 widgets is now 6 gadgets. Although the production possibilities frontier—the PPF—is a simple economic model, it’s a great tool for illustrating some very important economic lessons: The frontier line illustrates scarcity—because it shows the limits of how much can be produced with the given resources.
Any time you move from one point to another on the line, opportunity cost is revealed—that is, what you must give up to gain something else. Points within the frontier indicate resources that are underemployed. In turn, movement from a point of underemployment toward the frontier indicates economic expansion.
- When the frontier line itself moves, economic growth is under way.
- And finally, the curved line of the frontier illustrates the law of increasing opportunity cost meaning that an increase in the production of one good brings about increasing losses of the other good because resources are not suited for all tasks.
I hope you have enjoyed your journey to the frontier and learned some valuable lessons about economics along the way. – If you have difficulty accessing this content due to a disability, please contact us at 314-444-4662 or [email protected],
What is the law of increasing opportunity cost quizlet?
Law of Increasing Opportunity Costs. the more of a product that society produces, the greater is the opportunity cost of obtaining an extra unit. The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.
Which of the following is the underlying reason for the law of increasing opportunity cost?
The law of increasing opportunity cost is the concept that as you continue to increase production of one good, the opportunity cost of producing that next unit increases. This comes about as you reallocate resources to produce one good that was better suited to produce the original good.
What is the main effect of increasing opportunity costs?
Trade and Specialization – Before trade, truck producers in Roadway could exchange a truck for half a boat. In Seaside, however, a truck could be exchanged for five boats. Once trade opens between the two countries, truck producers in Roadway will rush to export trucks to Seaside.
- Boat producers in Seaside enjoy a similar bonanza.
- Before trade, one of their boats could be exchanged for one-fifth of a truck.
- By shipping their boats to Roadway, they can get two trucks for each boat.
- Boat producers in Seaside will rush to export boats to Roadway.
- Once trade between Roadway and Seaside begins, the terms of trade, the rate at which a country can trade domestic products for imported products, will seek market equilibrium.
The final terms of trade will be somewhere between one-half boats for one truck found in Roadway and five boats for one truck in Seaside. Suppose the terms of trade are one boat for one truck. (How the specific terms of trade are actually determined is not important for this discussion.
- It is enough to know that the final terms of trade will lie somewhere between Seaside’s and Roadway’s opportunity costs for boat and truck production.) Roadway’s truck producers will now get one boat per truck—a far better exchange than was available to them before trade.
- Roadway’s manufacturers will move to produce more trucks and fewer boats until they reach the point on their production possibilities curve at which the terms of trade equals the opportunity cost of producing trucks.
That occurs at point B in Panel (a) of Figure 17.5 “International Trade Induces Greater Specialization” ; Roadway now produces 7,000 trucks and 7,000 boats per year. Figure 17.5 International Trade Induces Greater Specialization Before trade, Roadway is producing at point A in Panel (a) and Seaside is producing at point A′ in Panel (b). The terms of trade are one, meaning that one boat exchanges for one truck. Roadside moves along its production possibilities curve to point B, at which the curve has a slope of −1.
Roadside will produce more trucks (and fewer boats). Seaside moves along its production possibilities curve to point B′, at which the slope equals −1. Seaside will produce more boats (and fewer trucks). Trade leads each country in the direction of producing more of the good in which it has a comparative advantage.
Similarly, Seaside will specialize more in boat production. As shown in Panel (b) of Figure 17.5 “International Trade Induces Greater Specialization”, producers will shift resources out of truck production and into boat production until they reach the point on their production possibilities curve at which the terms of trade equal the opportunity cost of producing boats.
This occurs at point B′; Seaside produces 3,000 trucks and 6,000 boats per year. We see that trade between the two countries causes each country to specialize in the good in which it has a comparative advantage. Roadway produces more trucks, and Seaside produces more boats. The specialization is not, however, complete.
The law of increasing opportunity cost means that, as an economy moves along its production possibilities curve, the cost of additional units rises. An economy with a comparative advantage in a particular good will expand its production of that good only up to the point where its opportunity cost equals the terms of trade.
As a result of trade, Roadway now produces more trucks and fewer boats. Seaside produces more boats and fewer trucks. Through exchange, however, both countries are likely to end up consuming more of both goods. Figure 17.6 “The Mutual Benefits of Trade” shows one such possibility. Suppose Roadway ships 2,500 trucks per year to Seaside in exchange for 2,500 boats, as shown in the table in Figure 17.6 “The Mutual Benefits of Trade”,
Roadway thus emerges with 4,500 trucks (the 7,000 it produces at B minus the 2,500 it ships) and 9,500 boats. It has 500 more of each good than it did before trade. The precise amounts of each good shipped will depend on demand an supply. The essential point is that Roadway will produce more of the good—trucks—in which it has a comparative advantage. Roadway and Seaside each consume more of both goods when there is trade between them. The table shows values of production before trade (BT) and after trade (AT). Here, the terms of trade are one truck in exchange for one boat. As shown in Panel (a) and in the exhibit’s table, Roadway exports 2,500 trucks to Seaside in exchange for 2,500 boats and ends up consuming at point C, which is outside its production possibilities curve.
Similarly, in Panel (b), Seaside ends up consuming at point C′, which is outside its production possibilities curve. Trade allows both countries to consume more than they are capable of producing. How does Seaside fare? When trade began, factors of production shifted into boat production, in which Seaside had a comparative advantage.
Seaside tripled its production of boats—from 2,000 per year to 6,000 per year. It sends 2,500 of those boats to Roadway, so it ends up with 3,500 boats per year. It reduces its production of trucks to 3,000 per year, but receives 2,500 more from Roadway.
- That leaves it with 5,500.
- Seaside emerges from the opening of trade with 1,500 more boats and 750 more trucks than it had before trade.
- As Roadway trades trucks for boats, its production remains at point B.
- But it now consumes combination C; it has more of both goods than it had at A, the solution before trade.
Seaside’s production remains at point B′, but it now consumes at point C′, where it has more trucks and more boats than it had before trade. Although all countries can increase their consumption through trade, not everyone in those countries will be happy with the result.
In the case of Roadway and Seaside, for example, some boat producers in Roadway will be displaced as cheaper boats arrive from Seaside. Some truck producers in Seaside will be displaced as cheaper trucks arrive from Roadway. The production possibilities model suggests that the resources displaced will ultimately find more productive uses.
They will produce trucks in Roadway and boats in Seaside. But there will be a period of painful transition as workers and owners of capital and natural resources move from one activity to another. That transition will be completed when the two countries are back on their respective production possibilities curves.
Full employment will be restored, which means both countries will be back at the same level of employment they had before trade. Finally, note the fact that the two countries end up at C (Panel (a)) and C′ (Panel (b)). These points lie outside the production possibilities curves of both countries. Notice that each country produces on its production possibilities curve, but international trade allows both countries to consume a combination of goods they would be incapable of producing! We see this same phenomenon in individual households.
Each household specializes in an activity in which it has a comparative advantage. For one household, that may be landscaping, for another, it may be the practice of medicine, for another it may be the provision of childcare. Whatever the activity, specialization allows the household to earn income that can be used to purchase housing, food, clothing, and so on.
Imagine for a moment how your household would fare if it had to produce every good or service it consumed. The members of such a household would work very hard, but it is inconceivable that the household could survive if it relied on itself for everything it consumed. By specializing in the activity in which each individual has a comparative advantage, people are able to consume far more than they could produce themselves.
Despite the transitional problems affecting some factors of production, the potential benefits from free trade are large. For this reason, most economists are strongly in favor of opening markets and extending international trade throughout the world.
What is an example of law increasing cost?
Law of increasing cost example Your business typically sells laptop cases for $50 and phone cases for $40. Because you want to increase laptop case production, you decide to move some of your employees from your business’s phone case department to the laptop case department to help make more laptop cases.
What does an increasing opportunity cost mean?
The law of increasing opportunity cost is an economic principle that describes how opportunity costs increase as resources are applied. (In other words, each time resources are allocated, there is a cost of using them for one purpose over another.)
Which of the following best describes the opportunity cost of an action?
The correct answer is b. Benefits foregone by not choosing an alternative course of action.
What is the shape of increasing opportunity cost?
Each curve has a different shape, which represents different opportunity costs. The bowed out (concave) curve represents an increasing opportunity cost, the bowed in (convex) curve represents a decreasing opportunity cost, and the straight line curve represents a constant opportunity cost.
Which of the following is an example of an opportunity cost quizlet?
The cost of making a choice is that the next best alternative is forgone. This is know as opportunity cost. For example if a Government decides to make the choice of devoting more resources to the NHS then the opportunity cost is devoting those resources into the education system.
Which of the following are used in calculating opportunity cost Mcq?
Exercises 1.2 – 1. Which of the following statements about opportunity cost is TRUE? I. Opportunity cost is equal to implicit costs plus explicit costs. II. Opportunity cost only measures direct monetary costs. III. Opportunity cost accounts for alternative uses of resources such as time and money.
- A) I, II and III.
- B) I c) III only.
- D) I and III only.2.
- Which of the following statements about opportunity costs is TRUE? I.
- The opportunity cost of a given action is equal to the value foregone of all feasible alternative actions. II.
- Opportunity costs only measure direct out of pocket expenditures. III.
To calculate accurately the opportunity cost of an action we need to first identify the next best alternative to that action. a) III only. b) I and III only. c) II only. d) None of the statements is true.3. Suppose that you deciding between seeing a move and going to a concert on a particular Saturday evening.
You are willing to pay $20 to see the movie and the movie ticket costs $5. You are willing to pay $80 for the concert and the concert ticket costs $50. The opportunity cost of going to the movie is: a) $5. b) $30. c) $35. d) $65.4. Suppose that you are willing to pay $20 to see a movie on Saturday night. A ticket costs $10, and the next-best alternative use of your time would be to go to dinner with a friend.
The cost of the dinner is $20 and you value the experience of having dinner with your friend at $60. The opportunity cost of seeing the movie is equal to: a) $50. b) $30. c) $20. d) $10.5. Suppose that you are willing to pay $50 to see a movie on Saturday night.
A ticket costs $15, and the next-best alternative use of your time would be to go to a concert which costs $80 and you value at $100. The opportunity cost of seeing the movie is equal to: a) $15. b) $20. c) $35. d) $70.6. Suppose you play a round of golf costing $75. The golf takes four hours to play. If you were not playing golf you could be working and earning $40 per hour.
The opportunity cost of your golf game is: a) $75. b) $235. c) $155. d) $160.7. Suppose you have bought and paid for a ticket to see Lady Gaga in concert. You were willing to pay up to $200 for this ticket, but it only cost you $110. On the day of the concert, a friend offers you a free ticket to the opera instead.
- Assuming that it is impossible to resell the Lady Gaga ticket, what is the minimum value you would have to place on a night at the opera, in order for you to choose the opera over Lady Gaga? a) $200. b) $110. c) $90. d)
- Suppose that you are willing to pay $350 to see Leonard Cohen play at the Save-On-Foods Arena.
Tickets cost $100, and the next-best alternative use of your time would be to work in paid employment earning $50 over the evening. The opportunity cost of seeing Leonard Cohen is equal to: a) $50. b) $100. c) $150. d) $200.9. I am considering loaning my brother $10,000 for one year.
He has agreed to pay 10% interest on the loan. If I don’t loan my brother the $10,000, it will stay in my bank account for the year, where it will earn 2% interest. What is the opportunity cost to me of the loan to my brother? a) $200. b) $800. c) $1,000. d) $1,200.10. In January, in an attempt to commit to getting fit, I signed a year-long, binding contract at a local gym, agreeing to pay $40 per month in membership fees.
I also spent $300 on extremely stylish gym clothes. This morning, I was trying to decide whether or not to actually go to the gym. Which of the following was relevant to this decision? a) The $40 that I paid the gym this month. b) The $300 I spent on gym clothes.
- C) The fact that I also had to write a 103 midterm exam today.
- D) All of the above were relevant.11.
- Suppose you have bought and paid for a ticket to see Kanye in concert.
- You were willing to pay up to $350 for this ticket, but it only cost you $100.
- On the day of the concert, a friend offers you a free ticket to Lady Gaga instead.
You can resell your Kanye ticket for $80. What do your sunk costs equal? a) $0. b) $20. c) $80. d) $100.12. Which of the following statements about sunk costs is FALSE? I. Sunk costs are those that cannot be recovered, no matter what future action is taken.
- II. Because sunk costs cannot be recovered, they are irrelevant for future decision-making. III.
- The presence of sunk costs can affect future decision-making, if they are large enough.
- A) II and III only.
- B) II only.
- C) III only.
- D) I and III only.13.
- As a member of UVic’s University Club, I pay $30 per month in membership fees.
In a typical month I spend about $50 on beer at the Club. Every month I also have the option of attending a meeting of the whiskey club (open only to Club members), at a cost per meeting of $15, payable at the beginning of each meeting. Given this, what do my monthly SUNK COSTS equal? a) $15.
What is the main reason for opportunity cost in an economy?
Definitions and Basics – Opportunity Cost, from the Concise Encyclopedia of Economics When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else.
If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book. Getting the Most Out of Life: The Concept of Opportunity Cost, by Russ Roberts on Econlib To get the most out of life, to think like an economist, you have to be know what you’re giving up in order to get something else.
Sometimes people are very happy holding on to the naive view that something is free. We like the idea of a bargain. We don’t want to hear about the hidden or non-obvious costs. Thinking about foregone opportunities, the choices we didn’t make, can lead to regret.
Choosing this college means you can’t go to that one. Marrying this person means not marrying that one. Choosing this desert (usually) means missing out on that one. Opportunity Cost, a LearnLiberty video. Prof. Don Boudreaux explains what economists mean when they talk about unintended consequences. Opportunities and Costs, by Dwight Lee.
The Freeman, Economics has been called the dismal science because it studies the most fundamental of all problems, scarcity. Because of scarcity we all face the dismal reality that there are limits to what we can do. No matter how productive we become, we can never accomplish and enjoy as much as we would like.
Which cost is known as opportunity cost Mcq?
Opportunity cost is defined as the cost of the next best alternative foregone. It represents the sacrifices that people must make due to the scarcity of resources.
What does increasing opportunity costs mean quizlet?
Increasing opportunity cost means that as you continue to increase production of one good, the opportunity cost of producing the next unit increases. This PPF is drawn concave because the opportunity cost and slope is not constant. The curve gets steeper and steeper.
Which of the following is true of the concept of increasing opportunity cost?
Which of the following is true of the concept of increasing opportunity cost? It suggests that the use of resources to produce a set of goods and services means that as more of one is produced, more of the other must be sacrificed.
Which of the following statements about opportunity costs is true?
Answer and Explanation: Of the given statements about opportunity costs, (a) III only is TRUE.I. The opportunity cost of a given action is equal to the value foregone of all feasible alternative actions.
What is an example of opportunity cost in economics?
Costs That Are Seen and Unseen – Our inclination is to focus on immediate financial trade-offs, but trade-offs can involve other areas of personal or professional well-being as well—in the short and long run. That’s why Caceres-Santamaria challenges us to consider not only explicit alternatives —the choices and costs present at the time of decision-making—but also implicit alternatives, which are “unseen” opportunity costs.
- A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else.
- A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).
- A commuter takes the train to work instead of driving. It takes 70 minutes on the train, while driving takes 40 minutes. The opportunity cost is an hour spent elsewhere each day.
What is opportunity cost short answer?
Opportunity Cost Opportunity cost is a concept in Economics that is defined as those values or benefits that are lost by a business, business owners or organisations when they choose one option or an alternative option over another option, in the course of making business decisions.
In simple words, it can be said as the value that is lost when a business is choosing between two or more alternatives. From an investor perspective, opportunity cost will always mean that the investment choices made will be carrying immediate loss or gain in the future. Opportunity costs can be viewed as a trade off.
Trade offs happen in decision making when one option is chosen over another option. Opportunity costs sums up the total cost for that trade off. For example, a certain kind of bamboo can be used to produce both paper and furniture. If the business takes a decision to consider using bamboo for furniture, then the society has to forego the number of bamboos that could have been used for manufacturing paper.
What is the main concept of opportunity cost?
Opportunity cost is an economics term that refers to the value of what you have to give up in order to choose something else. In a nutshell, it’s a value of the road not taken.