sprinterjr
Date:
2008-05-12
Time: 14:08:06
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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.
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