Chapter 2 Assignment: The Economic Problem: Scarcity & Choic ✓ Solved

Chapter 2 Assignment: The Economic Problem: Scarcity & Choice

In this assignment, you will demonstrate your ability to draw a simple production possibilities curve given data on the quantity of one input (labor) and the amount of labor required to produce each of two outputs (bags of chips and cases of salsa). You should also be able to identify the opportunity cost of one good in terms of the other as the slope of the Production Possibilities Frontier. You will explain your analysis of the figures to explain why it’s not possible to produce combinations of the two goods outside the PPF.

Suppose a nation has a total of 12 units of labor, which can be used to produce either chips or salsa. One bag of chips takes 2 units of labor to produce and one case of salsa takes 6 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 chip bags that can be produced?
  • What is the maximum quantity of salsa cases than can be produced?
  • Draw the nation’s production possibility frontier.
  • What is the opportunity cost of bags of chips in this nation?
  • Explain why the nation can’t produce both 4 bags of chips and 3 cases of salsa.
  • Explain why the nation shouldn’t produce both 2 bags of chips and 1 case of salsa.

Paper For Above Instructions

Scarcity is a fundamental concept in economics that arises because resources are limited while human wants are virtually unlimited. In the context of the economy described, the total labor available is 12 units. This limitation means that not all desired outputs can be produced simultaneously, leading to the concept of trade-offs. For example, if the nation wants to produce more bags of chips, it must reduce the production of salsa or vice versa. The given data highlights this reality—one bag of chips requires 2 units of labor, and one case of salsa requires 6 units. Therefore, if the labor is fully utilized, it creates a scenario where producing more of one product inevitably leads to less production of the other. This clearly illustrates why scarcity exists in this economy.

The maximum quantity of chip bags that can be produced can be calculated by using all 12 units of labor towards chips alone. Since each bag of chips requires 2 units of labor, the nation can produce:

Maximum Chip Bags = Total Labor / Labor per Bag = 12 units / 2 units per bag = 6 bags

On the other hand, to find the maximum quantity of salsa that can be produced, we again take the total labor and utilize it for salsa production. Since each case of salsa requires 6 units of labor, the calculation is as follows:

Maximum Salsa Cases = Total Labor / Labor per Case = 12 units / 6 units per case = 2 cases

Now, to visually represent these two outputs, we create a production possibilities frontier (PPF). The PPF illustrates the maximum possible output combinations of the two goods that can be produced with the available resources. Each axis on the graph represents one of the goods: the x-axis for bags of chips and the y-axis for cases of salsa. The endpoints of the curve would be (6 bags of chips, 0 cases of salsa) and (0 bags of chips, 2 cases of salsa). The interior points along the curve represent different combinations of production. For example, the point where 4 bags of chips are produced, only 0.67 cases of salsa can be produced since it requires 8 units of labor (4 bags * 2 units), leaving 4 units to produce only a fraction of salsa (4 units / 6 units = 0.67 cases).

The opportunity cost of producing one good in terms of the other can be understood through the slope of the PPF. When the economy shifts resources from producing bags of chips to producing salsa, the amount of chips forgone can be viewed as the opportunity cost. For instance, to produce one more case of salsa, which requires 6 units of labor, the nation must forgo the production of 3 bags of chips (since 6 units can produce 3 bags). Therefore, the opportunity cost of one case of salsa is 3 bags of chips.

To further explain the reasoning behind the inability of the nation to produce both 4 bags of chips and 3 cases of salsa: the total labor needed would equal 8 units (4 bags) + 18 units (3 cases), equaling 26 units, which exceeds the available 12 units. Thus, this combination lies outside the PPF, confirming it is unattainable given the current resource constraints.

Similarly, in the case of producing both 2 bags of chips and 1 case of salsa, we can calculate the labor needed as 4 units (2 bags) + 6 units (1 case) = 10 units. This combination, while feasible, is not optimal. The reason for this inefficiency is that the nation still has 2 units of labor remaining, which could potentially be used to produce more goods, thereby not fully utilizing its resources.

In conclusion, the scenario illustrates how scarcity necessitates choices in production, highlighting the trade-offs and opportunity costs associated with different production combinations. The outlined production possibilities frontier serves as a crucial tool for visualizing these economic concepts.

References

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