Question

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.

Answer 1

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.