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

An economy produces only wheat and cloth. Moving from combination A (100 tonnes wheat, 40 units cloth) to combination B (90 tonnes wheat, 60 units cloth) along its production possibility curve, the opportunity cost of one additional unit of cloth is:

The opportunity cost of one more unit of cloth is 0.5 tonne of wheat. Moving between the two points, 10 tonnes of wheat are given up to gain 20 units of cloth, so the ratio is 10 divided by 20, which equals 0.5 tonne per unit.

  1. A2 tonnes of wheat
  2. B0.5 tonne of wheatCorrect
  3. C10 tonnes of wheat
  4. D20 tonnes of wheat

Explanation

Wheat falls by 10 tonnes (100 to 90) while cloth rises by 20 units (40 to 60). Opportunity cost per unit of cloth = 10/20 = 0.5 tonne of wheat. The option of 2 tonnes inverts the ratio, which would give the cost of wheat in terms of cloth.

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