This is a very simple processor- it only has four bits. A CPU has millions of transistors, which means it has millions of bits to work with[EDIT: CPUs have more transistors than bits. This is because of complicated reasons that I can't explain right now.]. (this example uses NPN bipolar transistors) The function used to find the number of possible combinations a series of bits has is 2^b. (b is the number of bits) In this case the number of possible combinations is 16 because 16=2^4.
Fun-Fact:
A byte is equal two hexadecimal digits (8 bits).
