1. The amount spent on the goods and services becomes profit for the firm. In on

Question

1. The amount spent on the goods and services becomes profit for the firm. In one hour John can produce either 4 units of good X or 12 units of good Y. He works an 8 hour day. In his 8 hour day he can produce either ______ units of good X or _____ units of good Y. The opportunity cost of producing one unit of good X is ______ units of good Y. The opportunity cost of producing 12 units of good X is _____ units of good Y. If John wants to produce 12 units of good X then he will be able to produce at most _______units of good Y.

Explanation / Answer

The amount spent on the goods and services becomes profit for the firm. In one hour John can produce either 4 units of good X or 12 units of good Y. He works an 8 hour day. In his 8 hour day, he can produce either (i) 32 units of good X or (ii) 96 units of good Y. The opportunity cost of producing one unit of good X is (iii) 3 units of good Y. The opportunity cost of producing 12 units of good X is (iv) 36 units of good Y. If John wants to produce 12 units of good X then he will be able to produce at most (v) 60 units of good Y.

EXPLANATION

In an hour John produces 4 units of good X.

Also, in an hour John produces 12 units of good Y.

(i) If he works 8 hours a day only to produce good X, he would be able to produce (4*8 = 32) 32 units of good X.

(ii) If he works 8 hours a day only to produce good Y, he would be able to produce (12*8 = 96) 96 units of good Y.

(iii) Now, we will calculate the opportunity cost of good X in terms of good Y.

Opportunity cost can be regarded as the value of something that has to be given up in order to acquire something else.

In 1 hr John produces 4 units of good X OR 12 units of good Y.

So, informally ( just for the sake of our understanding ) we can write,

4 units of X = 12 units of Y

or, 1 unit of X = (12/3=3) 3 units of good Y

Therefore, the opportunity cost of producing 1 unit of good X is 3   units of good Y.

(iv) So, now we can calculate the opportunity cost of producing 12 units of good X.

The opportunity cost of producing 1 unit of good X is 3 units of good Y.

Therefore, similarly the opportunity cost of producing 12 units of good X is (12*3=36) 36  units of good Y.

(v) In an hour John produces 4 units of good X.

So, to produce 12 units of good X John takes 3 hours. He is therefore left with 5 hours ( in an 8 hour day ) to produce good Y. We know, in an hour John produces 12 units of good Y. So in 5 hours, John will produce (5*12=60) 60 units of good Y.

Then we can conclude,

If John wants to produce 12 units of good X then he will be able to produce at most 60 units of good Y.

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