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CA Foundation · Business Economics · Nature and Scope of Business Economics

An economy can produce combinations of wheat and cotton along its production possibility curve, which is concave to the origin. Moving from one point to another on the curve, giving up 10 lakh tonnes of cotton yields 4 lakh tonnes more wheat. What is the opportunity cost of 1 tonne of wheat in this move?

The opportunity cost of one tonne of wheat is 2.5 tonnes of cotton. Dividing the cotton sacrificed, 10 lakh tonnes, by the extra wheat gained, 4 lakh tonnes, gives 2.5. The figure 0.4 is the reverse ratio, which measures the cost of cotton.

  1. A0.4 tonne of cotton
  2. B2.5 tonnes of cottonCorrect
  3. C4 tonnes of cotton
  4. D10 tonnes of cotton

Explanation

Opportunity cost of wheat = cotton given up / wheat gained = 10/4 = 2.5 tonnes of cotton per tonne of wheat. Check: 4 x 2.5 = 10. The option 0.4 is the inverse, which is the opportunity cost of a tonne of cotton in terms of wheat.

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