TestMagic Forums - View Single Post - Is opportunity cost and price of X in terms of Y the same?

SprinterJr · 05-11-2008, 07:28 PM

I have difficulty undrstanding the statement - "when the price of X in terms of Y is greater than the opportunity cost of Y, we are paying more than it really cost to produce X. In such a case we may say that the economy is inefficient."(Witztum. A, 2005)
This statement was made in relation to a linear PPF, where 100 units of labour was available that can produce either 100 units of good X or 200 units of good Y and of course any feasable combinations of both. There was a point A on the PPF of coordinates (25,150), which represents a productively efficient point and a point B under the PPF of coordinates (25,100) which represents an productively inefficient point. I know that the opportunity cost of X is 2 units of Y and that the opportunity cost of Y is 1/2 unit of X.

My problem come from understanding the price of X in term of Y and the concept of paying more than it really cost to produce X.

Can someone please help me to understand this important concept. Thanks for the help.

05-11-2008, 07:28 PM	#1 (permalink)
SprinterJr Trying to make mom and pop proud Join Date: May 2008 Posts: 1	Is opportunity cost and price of X in terms of Y the same? I have difficulty undrstanding the statement - "when the price of X in terms of Y is greater than the opportunity cost of Y, we are paying more than it really cost to produce X. In such a case we may say that the economy is inefficient."(Witztum. A, 2005) This statement was made in relation to a linear PPF, where 100 units of labour was available that can produce either 100 units of good X or 200 units of good Y and of course any feasable combinations of both. There was a point A on the PPF of coordinates (25,150), which represents a productively efficient point and a point B under the PPF of coordinates (25,100) which represents an productively inefficient point. I know that the opportunity cost of X is 2 units of Y and that the opportunity cost of Y is 1/2 unit of X. My problem come from understanding the price of X in term of Y and the concept of paying more than it really cost to produce X. Can someone please help me to understand this important concept. Thanks for the help.