Question

Suppose a nation has a total of 18 units of labor, which can be used to produce either televisions or butter. One TV takes 3 units of labor to produce and 1 butter takes 2 units of labor to produce.

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

What is the maximum quantity of TVs that can be produced?

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

What is the opportunity cost of butter in this nation?

Explain why the nation can’t produce both 6 TVs and 9 butters.

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

Answer 1

Scarcity exists when it is not possible to produce an unlimited quantity of products as there will be one or more resource which will act as a barrier.

The Production Possibilities Curve is drawn as below

So we see that there is a limitation to the number of units of either type of good that can be produced. Thus scarcity exists.

Total Units of labour available= 18

Total TVs that can be produced = 18 / 3 = 6

Total Butter that can be produced = 18/2 = 9

9 butter can be produced in place of 6 TV

1 butter can be produced in pkace of 6/9 or 2/3 TVs

So the opportunity cost of butter is 2/3TV

There is a limitation to the amount of resource available which is units of labour in this case. TV and Butter both needs some units of labour. Keeping in mind the total availability of labour, the maximum TV that can be produced and no butter is 6 while the maximum butter that can be produced with no TV is 9. From either of these stages, we need to give up one unit to produce another. So it is not possible to produce 9 butter and 6 TVs simultaneously.

If the nation produces 1 TV and 2 Butter, the point falls inside the Production Possibilities Curve. So it is inefficient utilization of resources. 1 TV (3 units of labour) and  2 butter (4 units of labour) will mean total consumption of 7 units of labour instead of the available 18. So the nation should not produce 1 TV and 2 Butter.

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