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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. - Economics

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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.

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Solution

Marginal rate of transformation is the ratio of number of units sacrificed to gain an additional unit of another good.

`MRT=(DeltaY)/(DeltaX)=`

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

`MRT=(DeltaY)/(DeltaX)`

I 0 30 -
II 1 27 -3
III 2 21 -6
IV 3 12 -9
V 4 0 -12

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

`MRT=(DeltaY)/(DeltaX)=`

Thus, MRT or the opportunity cost of getting an additional unit of Good X is 3 units of Good Y.

Concept: Concept of Opportunity Cost
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