Question

Suppose a British Columbia has a total of 12 units of labour, which can be used

to produce either computer or wheat. One computer takes 6 units of labour to produce and 100 kg wheat

takes 2 units of labour to produce.

(a) Explain why scarcity exists in this economy. Use the data as evidence of your reasoning.

(b) What is the maximum quantity of computers that can be produced?

(c) What is the maximum quantity of wheat than can be produced?

(d) Draw the BC’s production possibility curve.

(e) What is the opportunity cost of computers in BC?
(f) Explain why BC can’t produce both 3 computers and 400 kg of wheat.
(g) Explain why the BC shouldn’t produce both 1 computer and 200 kg of wheat.

Answer 1

(a) Scarcity exists because BC can produce either 2 computers or 600 kg wheat. It cannot produce both extremes. With 12 units of labor (scarce resource), BC can produce a combination of the two goods.

(b) A maximum of 2 computers can be produced. (12/6 = 2)

(c) A maximum of 600 kg of wheat can be produced. (12/ 2 = 6*100 = 600)

(d) BC's production possibility curve:

  

(e) Opportunity cost of computers is 300 kg wheat
With 12 hours of labor BC can produce either 2 computers or 600 kg wheat. So opportunity cost of 1 computer is 600/2 = 300 kg of wheat.
2 computers = 600 kg wheat.
1 computer = 300 kg wheat

(f) 3 computers and 400 kg wheat (Point A in the graph above) is beyond the capacity of BC with the current resources. The point A lies outside the PPF.

(g) 1 computer and 200 kg wheat (Point B in the graph above) is a situation where BC is not optimally utilizing its resources. The point B lies inside the PPF. Point B indicates unemployment.