Solutions: Case Study – Brexit
1. Rolls Royce can produce either 50 car parts, 100 aircraft parts, or a combination or both. Represent cars parts on the y-axis and aircraft parts on the x-axis. Draw Rolls Royce PPF on the diagram below. Assume the PPF is linear.
The best way to draw a PPF is to find how many of each good the firm can produce if they produce that good only. In this case we are told Rolls Royce can either produce 50 car parts, 100 aircraft parts, or a mix. This means we know the point (0, 50) and (100, 0) are on our PPF. Simply label these points and connect them to find Rolls Royce’s PPF.
2. For Rolls Royce, what is the marginal opportunity cost of 1 aircraft part? 1 car part?
Remember that the marginal opportunity cost of the good on the x-axis, in this case aircraft parts, is simply the slope of the PPF. Taking the slope we find that we must trade 50 car parts for every 100 aircraft parts, this means that the marginal opportunity cost of one aircraft part is 0.5 car parts.
The marginal opportunity cost of the good on the y-axis, in this case car parts, is equal to the inverse of the slope. This means we must trade 100 aircraft parts for every 50 car parts. The marginal opportunity cost of one car part is 2 aircraft parts.
3. If Rolls Royce needs to produce 40 aircraft parts, how many car parts can they make?
Since there is no opportunities for trade, this is a relatively simple problem. All you have to do is draw a line up from 40 aircraft parts, and see how many car parts Rolls Royce can make with the remaining resources.
Looking at the diagram you can see that when Rolls Royce produces 40 aircraft parts, they can produce 30 car parts.
Rolls Royce can produce a maximum of 100 aircraft parts, and for every 10 they give up they can make 5 car parts. If they are only producing 40 aircraft parts they have given up 60. The trade off in the production of 60 aircraft parts allows them to produce 30 car parts.
4. Volkswagon can produce either 120 car parts, 40 aircraft parts, or a combination or both. Represent cars parts on the y-axis and aircraft parts on the x-axis. Draw Volkswagon’s PPF on the diagram below, and redraw Rolls Royce’s PPF from question 1. Assume both PPFs are linear.
Again, the best way to draw a PPF is to find how many of each good the firm can produce if they produce that good only. Based on the information we are given, we know the points (0, 120) and (40, 0) are on Volkswagon’s PPF. Simply label these points and connect them to find Volkswagon’s PPF.
5. For Volkswagon, what is the marginal opportunity cost of 1 aircraft part? 1 car part?
Taking the slope of Volkswagon’s PPF, we find that we must trade 120 car parts for every 40 aircraft parts, this means that the marginal opportunity cost of one aircraft part is 3 car parts for 1 aircraft part.
The marginal opportunity cost of the good on the y-axis, in this case car parts, is equal to the inverse of the slope. This means we must trade 40 aircraft parts for every