Answer to Question #176860 in Microeconomics for Taym

Question

Imagine a society that produces military goods and consumer goods, which we will

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.

c. Show a point that is feasible but inefficient.

d. Imagine that the society has two political parties, called the Hawks (who want

a strong military) and the Doves (who want a smaller military). Show a point

on your production possibilities frontier that the Hawks might choose and a

point that the Doves might choose.

e. Imagine that an aggressive neighboring country reduces the size of its military.

As a result, both the Hawks and the Doves reduce their desired production of

guns by the same amount. Which party would get the bigger “peace dividend,”

measured by the increase in butter production? Explain.

Answer 1

a)Production possibility frontier shows the cost incurred in producing one product against another. At efficiency a movement along the curve measures how many of one product must be sacrificed to make another. This is why the the curve is bowed outward because as a country makes more of a product it becomes more difficult to increase production.

b.) Any point inside the shaded region that is not in the outer parts of the curve is possible but inefficient. Any point that is not inside the shaded region requires more resources than area available and are thus not possible to achieve.

c. Doves would prefer a point that produces many butter than guns because they like peace. On the other hand the Hawks would choose a situation where many guns are being produced because they like security.

d.) The decrease in demand for guns would provided a larger “peace dividend” to the hawks because of the steepness of the production frontier. For each gun that the hawks would stop producing they would be able to make a more amount of butter than the doves would be able to while forfeiting the same amount of guns.