The opportunity cost is the value of the best

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Unformatted text preview: e opportunity cost of the extra bale of fine wool. 1/7/2009 Class 1 22 Australia Coarse wool (bales) Opportunity cost of 1 bale of fine wool is a bale of coarse wool Opportunity cost of 1 bale of coarse wool is 2 bales of fine wool Slope = rise/run = 1/2 0.4 m Fine wool (bales) 1 m 0.2 m 2 m 1/7/2009 Class 1 23 New Zealand Coarse wool (bales) 0.75 m Opportunity cost of 1 bale of fine wool is 3/2 bales of coarse wool Opportunity cost of 1 bale of coarse wool is 2/3 of a bale of fine wool 0.6 m Slope = rise/run = 3/2 0.4 m 0.5 m 1/7/2009 Class 1 Fine wool (bales) 24 Questions How should production be organized? Suppose you wanted to ensure that some fine wool was produced. Where would you have it produced? Why? Australia? New Zealand? 1/7/2009 Class 1 25 How should production be organized? Suppose all resources are used for coarse wool production: Total output = 1m bales + 0.75m bales = 1.75m bales To produce the first bale of fine wool implies that coarse wool production must drop Who should produce the first bale of fine wool? Class 1 1/7/2009 26 How should production be organized? If NZ produces the first bale of fine wool, output of coarse wool must fall by 3/2 bales Opportunity cost of fine wool in NZ = 3/2 If Australia produces the first bale of fine wool, output of coarse wool must fall by 1/2 bale Opportunity cost of fine wool in Australia = If Australia produces the first bale of fine wool, we observe a smaller decrease in coarse wool output Efficiency demands that Australia produce the first bale of coarse wool Why? Because Australia is the producer with the low opportunity cost 1/7/2009 Class 1 27...
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