# Quiz 2: The Economic Problem

As given, the production possibilities of Brazil for ethanol and food crops are shown in the table below: Table 1 a) Based on the above information given in the table 1 about two goods - ethanol and food crops, a graph for Brazil's PPF is drawn as below, Fig: Brazil's PPF On the x - axis food crops and on the y - axis ethanol has been taken. The points that lie on the curve are the cost efficient points of production of the two goods. And, the points that lie outside the PPF such as blue point x are not attainable with the given resources. Therefore, points that lie outside the PPF indicate scarcity of resources. b) If Brazil produces 40 barrels of ethanol a day then it has to produce 3 tons of food per day to achieve production efficiency. The diagram below makes it clearer. c) Brazil can't produce all the combinations of the two goods. It has to make choice among the points on the PPF , where it can produce. All the points that lie on the PPF are least cost combinations of ethanol and food crops ( A, B, C, D, E, and F ). Therefore, to produce more of food crops, some ethanol production has to be given up. And, to produce more ethanol some food crop production has to be given up.

(a) If Brazil increases its production of ethanol from 40 barrels per day to 54 barrels per day, the production of food crops declines from 3 tons per day to 2 tons per day. This means that the opportunity cost of increasing the production of ethanol from 40 barrels per day to 54 barrels per day is 1 ton per day. (b) If Brazil increases its production of food crops from 2 tons per day to 3 tons per day, the production of ethanol declines from 54 barrels per day to 40 barrels per day. This means that the opportunity cost of increasing the production of food crops from 2 tons per day to 3 tons per day is 14 barrels per day. (c) The two answers are two different ways of stating the same thing. In other words, one implies the other.

The PPF of Brazil is bowed out, and, therefore, it indicates an increasing opportunity cost along the curve. Based on the information given in the table 1 about two goods - ethanol and food crops, a graph for Brazil's PPF is drawn as below, Fig: Brazil's PPF On the x - axis food crops and on the y - axis ethanol has been taken. It can be said that Brazil faces an increasing opportunity cost in ethanol production. When the production of ethanol increases from 0 barrel per day to 22 barrels per day then the opportunity cost of ethanol is tonne of food. Therefore, Brazil faces an increasing opportunity cost in the production of ethanol.

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