2. According to Statistics Canada, 10.7 million hectares of land in Canada were
ID: 1141242 • Letter: 2
Question
2. According to Statistics Canada, 10.7 million hectares of land in Canada were used for wheat or corn farming in 2016. Of those 10.7 million hectares, farmers used 9.4 million hectares to grow 1 134.5 million bushels of wheat and 1.3 million hectares of land to grow 492.7 million bushels of corn. Suppose that Canada’s wheat farming and corn farming are efficient in production. At that production point, the opportunity cost of producing 1 additional of wheat is 1.7 fewer bushels of corn. However, because farmers have increasing opportunity costs at higher levels of wheat production, additional bushels of wheat have an opportunity cost greater than 1.7 bushels of corn. For each of the following production points, decide whether the production point is (i) feasible and efficient in production, (ii) feasible and not efficient in production, (iii) not feasible (iv) unclear as to whether or not it is feasible.
a) Farmers use 1.6 million hectares of land to produce 180 million bushels of wheat, and they use 2.4 million hectares of land to produce 900 million bushels of corn. The remaining 6.7 million hectares are left unused.
b) From their original production point, farmers transfer 1.6 million hectares of land from corn to wheat production. They now produce 1 144.5 of bushels of wheat and 475.7 million bushels of corn.
c) Farmers reduce their production of wheat to 1 084.8 million bushels and increase their production of corn to 567.25 million bushels. Along the production possibility frontier, the opportunity cost of going for 492.7 million bushels of corn to 567.32 million bushels or corn is 0.666 bushels of wheat per bushel of corn
Explanation / Answer
a) This point is feasible but not efficient in production. Producing 180 billion bushels of wheat and 900 billion bushels of corn is less of both wheat and corn than is possible. They could produce more if all the available farmland were cultivated.
b). At this new production point, farmers would now produce 1 billion more bushels of wheat and 1.7 billion fewer bushels of corn than at their original production point. This reflects an opportunity cost of 1.7 bushels of corn per additional bushel of wheat. But, in fact, this new production point is not feasible because we know that opportunity costs are increasing. Starting from the original production point, the opportunity cost of producing 1 more bushel of wheat must be higher than 1.7 bushels of corn.So farmers cannot increase production to 1144.5 busels of wheat just at the cost of (492.7 - 475.7=) 17 million bushels of corn.
c). This new production point is feasible and efficient in production. Along the production possibility frontier, the economy must forgo 0.666 bushel of wheat per additional bushel of corn. So the increase in corn production from 492.7 billion bushels to 567.32 billion bushels costs the economy (567.32 492.7) billion bushels of corn × 0.666 bushel of wheat per bushel of corn = 49.7 bushel of wheat. This is exactly equal to the actual loss in wheat output: the fall from 1134.5 billion to 1084.8 billion bushels of wheat.
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