Opportunity cost — practice question

In August 2015, the Egyptian Government launched a second Suez Canal beside the existing one so that more and larger ships could travel from the Mediterranean Sea to the Gulf of Suez. Construction cost more than US$8 billion, and land had to be bought, capital equipment purchased and wages paid to the workers building the canal. At the same time, there were demands for higher public spending on healthcare, especially to raise the standard of public hospitals, and on education, particularly adult literacy. The Egyptian Government expects the canal to draw in more ships, including those carrying goods and those carrying passengers. The amount of goods and people transported by sea is affected by a range of influences. These include how fast transport is, the level of economic activity and the price of other transport methods. Some goods must be moved rapidly, and recent years have shown how demand for sea transport is highly responsive to recessions and booms. Fig. 1 illustrates how the sea transport market has recently been influenced by changes in the air transport market. Fig. 1 The market for sea transport shows a vertical axis labelled “price of sea transport” and a horizontal axis labelled “quantity of sea transport”. The origin is labelled “O”. There are two horizontal price lines labelled $P_1$ (higher) and $P_2$ (lower). There are two vertical quantity lines labelled $Q_1$ (to the right) and $Q_2$ (to the left). An upward sloping supply curve is labelled “S”. There are two downward sloping demand curves, the original demand curve labelled “$D_1$” (to the right) and a new demand curve labelled “$D_2$” (to the left). The Egyptian Government hopes that new industries linked to shipping will be established along the canal. Developing infant industries may help bring down the country’s unemployment rate, which in 2015 was 12.5%. In 2015, the country had a population of 90 million, a population growth rate of 1.5% and a labour force of 28 million. Its death rate was falling. Government spending on healthcare was equal to 4% of Gross Domestic Product (GDP). 2015 also recorded GDP at US$280 billion and an economic growth rate of 5%.