Suppose that there are 10 million workers in Canada, and that each worker can pr

Question

Suppose that there are 10 million workers in Canada, and that each worker can produce either 2 cars or 30 tonnes 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 tonne 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) Suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 tonnes 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?

Explanation / Answer

(a) The opportunity cost of producing 30 bushels of wheat is two cars, and the opportunity cost of producing 2 cars is thirty bushels of wheat. Similarly the opportunity cost to produce 1 car is 15 bushels of wheat and conversly you can produce 1/15 cars for one bushel. Opportunity cost measures the cost of any economic choice in terms of the next best alternative foregone. (b) If every worker produced 1 car then those workers can still each produce 15 bushels. Therefore they can produce and consume 150,000,000 bushels. To generate this chart in Excel you need two columns. One represents Cars and the other represents wheat. Start the car column at 20 million and reduce it by a multple of two for each cell below (I used 2000). So you would have 20,000,000 19,998,000 19,996,000 etc. Then start your bushels column at zero and add to it in multiples of 30 corresponding to the car column. 30,000 60,000 90,000 Bring these columns down until the cars reduce to zero and the bushels increase to 300 million. (c) Suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 tonnes 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?

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