Chapter 2, Problem 1TC

To determine

The production possibilities curve for 2018 and 2022.

Explanation of Solution

Figure 1 shows the production possibilities curve for 2018 and 2022.

Figure 1

In the above graph, the vertical axis measures the quantity of Powerwall batteries and the horizontal axis measures the quantity of Model 3 sedan’s batteries.  In 2018, the maximum production is 600 thousands of Model 3 sedan’s batteries or 600 thousands Powerwall batteries. In 2022, the maximum production is 600 thousands of sedan 3 batteries or 900 thousands power wall batteries.

Opportunity cost of producing Model 3 sedan’s batteries in 2018 is calculated as follows:

$\begin{array}{c}\text{Opportunity cost =}\left(\frac{\text{Given up unit}}{\text{Gained unit}}\right)\\ =\left(\frac{600,000}{600,000}\right)\\ \text{=1}\end{array}$

Thus, the opportunity cost of producing one Model 3 sedan’s battery in 2018 is 1Powerwall battery.

Opportunity cost of producing one Model 3 sedan’s battery in 2022 is calculated as follows:

$\begin{array}{c}\text{Opportunity cost =}\left(\frac{\text{Given up unit}}{\text{Gained unit}}\right)\\ =\left(\frac{900,000}{600,000}\right)\\ \text{=1}\text{.5}\end{array}$

Thus, the opportunity cost of producing one Model 3 sedan’s battery in 2022 is 1.5 Powerwall batteries.

Economics Concept Introduction

Concept introduction:

Opportunity cost: Opportunity cost refers to the value of forgone goods and services to receive the other goods and services.

Production Possibilities Frontier (PPF): PPF refers to the different combination of goods and services that can be produced efficiently with given resources by a country. Any point inside the PPF represents inefficient usage of the resources and any point outside the PPF represents that it is not attainable with the available resources.