Answer to Question #310487 in Macroeconomics for Kifayat

Question

Imagine a society that produces military goods and consumer goods, which we’ll call

“guns” and “butter.”

A. Draw a production possibilities frontier for guns and butter. Using the concept of

opportunity cost, explain why it most likely has a bowed-out shape.

B. Show a point that is impossible for the economy to achieve. Show a point that is feasible

but inefficient.

C. Imagine that the society has two political parties, called the ABC (who want a strong

military) and the XYZ (who want a smaller military). Show a point on your production

possibilities frontier that the ABC might choose and a point that the XYZ might choose.

D. Imagine that an aggressive neighbouring country reduces the size of its military. As a

result, both the ABC and the XYZ reduce their desired production of guns by the same

amount. Which party would get the bigger “peace dividend,” measured.

Answer 1

a) It is bowed out because the opportunity cost of butter depends on how much butter and how many guns the economy is producing.

b) Point F is impossible to achieve due to limited resources while point A is achievable but it shows inefficient utilization of resources.

c) Political party ABC would produce at point B as needs more guns compared to butter to ensure a strong military while party XYZ would produce at point E since it does not require much guns.

d) Party ABC would get bigger peace dividend as their competitor has decided to keep peace by reducing gun production and therefore ABC will feel a relief.