Question

Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.

Required:
a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.
b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade?
c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Should Canada accept the deal?

Answer 1

Answer:

A) Opportunity Cost = 1/15 or 0.067 car per wheat

B) PPC downward sloping concave curve, with cars & wheat axis intercepts = 20 & 300 (resp). 15M bushels consumption with 10M cars

C) 1 Car : 20 bushels wheat is not beneficial deal

Explanation:

A) Opportunity Cost is the cost of next best alternative foregone while choosing an alternative.

• As 20 million cars or 300 million bushels wheat can be produced, opportunity cost of a bushel wheat is 20 M /300 M ie 0.067 units car .  

B) Production Possibility curve curve shows 2 product combinations, that an economy can produce with given resources & technology. Given fixed resources & technology, goods are inversely related & so curve downward sloping. And, it is concave due to increasing Marginal Opportunity Cost.

• Canada's PPC is downward sloping concave curve, with intercept = 20M on axis of cars & intercept = 300M on axis of wheat.
• If Canada consumes (& produces) 10 million cars, it can consume 15M bushels of wheat

C) Domestic Car : Wheat trade off ratio is = 20M : 300M ie 1: 15 . So, Trade of 20 bushels wheat per car is not beneficial for Canada. As, it is higher than domestic sacrifise ratio of 15 bushels wheat per car.