Question

3. 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.

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? Label this point on the production possibilities frontier.

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? Label this point on your diagram. Should Canada accept the deal?

Answer 1

The opportunity cost of producing 1 car in Canada if equal to 15 bushels of wheat that would have been produced

A. A Canadian can make two 2 cars or 30 bushels of wheat. The opportunity cost of 1 car = 15 bushels of wheat. In the same way, the opportunity cost of a bushel is 1/15 of having a car production.

The relation in the opportunity cost of the two goods is the fact that they are reciprocals of each other.

C. If the US decides to buy 10 million cars from Canada, then Canada would have to produce 20 million cars because that is what they consume also.

At 20 bushels of wheat per car, they would be consuming 200 million bushels plus the 10 million cars.

What is opportunity cost?

This is the value of the option that you give up when you are faced with two choices.

It is loss of the gains from one alternative when you choose to go with the option of another alternative.

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