Question

A nation’s residents can allocate their scarce resources either to producing consumer goods or to producing human capital—that is, providing themselves with training and education. The following table displays the production possibilities for this nation:

Production Combination	Units of Consumer Goods	Units of Human Capital
A	0	100
B	10	97
C	20	90
D	30	75
E	40	55
F	50	30
G	60	0

(a) Suppose that the nation’s residents currently produce combination A. What is the opportunity cost of increasing the production of consumption goods by 10 units? By 60 units?

(b) Does the law of increasing additional costs hold true for this nation? Why or why not?

Short answer

(a) When 10 units, the opportunity cost is 90 units. When 60 units, the opportunity cost is 40 units.

(b) Yes, it holds true.

Step-by-step solution

Step 1. Given Information

The data for consumer goods and human capital is as follows:

Production Combination	Units of Consumer Goods	Units of Human Capital
A	0	100
B	10	97
C	20	90
D	30	75
E	40	55
F	50	30
G	60	0

Part (a) Opportunity Cost

Opportunity cost is the opportunity of the next best alternative forgone to satisfy human wants.

If the combination A is produced in the economy.

When the production of consumption goods is increased by 10 units, the opportunity cost is the 90 units forgone of the units of human capital.

When the production of consumption goods is increased by 60 units, the opportunity cost is the 40 units forgone of the units of human capital.

Part (b). The law of additional cost

The law of additional cost states that the increase in the production of one good would decrease the production of other goods.

The law holds true in this case as well as there is an increase in units of consumer goods the units of human capital decrease.