Question

Suppose a nation has a total of 12 units of labor, which can be used to produce either guns or butter. One gun takes 6 units of labor to produce and 1 butter takes 2 units of labor to produce. Use the information to create a table showing the different combinations of guns and butter that can be produced.

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

• What is the maximum quantity of guns that can be produced?

• What is the maximum quantity of butter than can be produced?

• What is the opportunity cost of producing guns in this nation?

• Explain why the nation can’t produce both 3 guns and 4 butters.

• Explain why the nation shouldn’t produce both 1 gun and 2 butters.

Answer 1

It is assumed that the nation has only 12 units of labor.

Since, the resources are limited thus there is a limit on the amount of guns and butter that can be prouduced. In other words scarcity exist beyond PPC. Refer the below explanations for evidence.

If all the labor is used to produce guns then the nation can produce a maximum of 2 guns (=12/6) but there will be no labor left to produce butter. Now, when all the labor is used to produce butter then it can produce maximum of 6 units of butter (=12/2) now no gun would be produced.

Thus, the production possibility frontier would be drawn on a set of axes where horizontal axis shows butter and vertical axis shows guns. The PPC is the line from (0,2) and (6,0).

In the economy 2 gun = 6 butter

Opportunity cost of producing 1 gun = 3 units of butter.

The nation can produce a maximum of 2 guns thus, the 3 guns lie beyond the PPC. Hence, producing 3 guns and 4 butters is impossible with 12 units of labor.

If the nation produces 1 gun and 2 units of labor then the output would lie below the PPC that is the economy will be under utilizing the available resources that is the resources will get wasted. Hence, they must not produce 1 gun and 2 butter. Labor utilized under this scenario = 1×6 + 2×2 = 10 labor that is 2 unit of labor is unutilized. Thus, they must not produce 1 gun and 2 butter.