Question

Explain the concept of marginal opportunity cost using a numerical example.

Answer 1

The marginal opportunity cost can be defined as the ratio of number of units of a good sacrificed to produce an additional unit of another good. It is also known as Marginal Rate of Transformation (MRT). Marginal opportunity cost of a good in terms of the other good can be estimated as :

$\underset{MRT}{MOC}=\frac{\Delta \text{loss of output of good Y}}{\Delta \text{gain of output of good X}}\frac{=\Delta Y}{X}=\frac{=Y2-Y1}{X2-X1}$
Marginal opportunity signifies the rate of sacrifice of good Y
$\begin{array}{cccc}\text{Combinations}& \text{Good X}& \text{Good Y}& \text{MOC}\\ A& 1& 20& -\\ B& 2& 18& 2\\ C& 3& 15& 3\\ D& 4& 11& 4\end{array}$

Example : In the given schedule, if we want to move from combination A to combination B, we will produce one additional unit of X, but we will have to forgo 2 units of Y. The marginal opportunity cost of X in terms of Y at this stage is 2 units, similarly for other combinations too can be worked out.