Explain the concepts of Opportunity Cost and Marginal Rate of Transformation using a production possibility schedule based on the assumption that no resource is equally efficient in production of all goods.
Marginal rate of transformation is the ratio of number of units sacrificed to gain an additional unit of another good.
For example, assuming that resources and technology remain constant, an economy is producing Good X and Good Y. Different combinations of production of Good X and Good Y are given in the product possibility schedule:
|Production Possibilities||Good X||Good Y||
In the beginning, at the production point II, where 1 unit of Good X and 27 units of Good Y are produced. To produce an additional unit of Good X, 3 units of Good Y must be sacrificed.
Here, the marginal rate of transformation (MRT) is
Thus, MRT or the opportunity cost of getting an additional unit of Good X is 3 units of Good Y.