Question

Suppose that you open a bar that serves two types of mixed drinks, bammers and slammers. A bammer consists of two shots of vodka and one shot of rum, and a slammer consists of one shot of vodka and two shots of rum. You currently have 60 shots of vodka and 60 shots of rum at the bar.

            a. Draw your PPC for bammers (B) and slammers (S). Put bammers (B) on the vertical axis. (HINT: To derive the PPC, it is easiest to start with a table to keep track of the resources being used. For example, if 0 slammers are produced and all resources are devoted to bammers, how many bammers can be produced? That point is the vertical intercept for the PPC. Next. ask what happens if 5 less bammers are produced? 10 less, etc.? From the table, you can derive the points that make up the PPC graph. What limits the PPC are the quantities of vodka and rum.)
            b. What can be said about the utilization of resources when 20 bammers and 20 slammers are produced?
            c. How would you characterize the allocation of 10 bammers and 10 slammers? What about 30 bammers and 30 slammers?
            d. What is the opportunity cost of the first 5 bammers produced? What is the opportunity cost of the last 5 bammers produced?

Answer 1

Opportunity cost of producing 1 commodity is the amount of the other commodity which are sacrificed to produce 1 unit of the first commodity. Here vodka and rum are used in a fixed proportion of 2:1 in bammer production whereas 1:2 in production of slammer .