Answer:

Explanation:1. You have ` 1,000 as your pocket money. You can deposit this money in a bank and get ` 1,100 after an year. However, you

have two other choices:

(i) lend this money to your friend who is ready to pay you ` 1,050 after an year, or

(ii) keep the money with you as CASH in hand.

What is opportunity cost of KEEPING the money as cash in hand?

Sol. The opportunity cost of keeping the money as cash in hand is ` 100 in terms the loss of interest that the bank would have

paid.

Ans. Opportunity cost = ` 100.

2. If the SLOPE of PPC remains constant (or does not change) with an increase in the

production of Good-X (on horizontal axis) at the cost of Good-Y (on vertical axis),

what is the shape of PPC? DRAW the PPC.

Sol. PPC in this case will be a downward sloping straight line touches X-axis and Y-axis. It

happens when marginal opportunity cost (or marginal rate of transformation) is

constant. See Fig. 1.

3. An economy produces two goods: wheat and RICE. These could be produced in only

two combinations.

Combination A: Wheat: 20,000 tonnes; Rice: 5,000 tonnes

Combination B: Wheat: 10,000 tonnes; Rice: 9,000 tonnes

What is the marginal opportunity cost of producing an extra tonne of rice at the cost of wheat. (Compare combination A

with combination B.)

Sol. Marginal opportunity cost =

Loss of wheat production

Gain of rice production

=

10 000

4 000

,

,

= 2.5.