Answer to Question #303630 in Microeconomics for abir

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) The PPF below is curved outwards in bow shape due to increasing opportunity cost as the resources are not all equally productive in all activities.

b) From the above PPF, point F is feasibly attainable due to limited resources.

c) From the PPF point A is attainable but shows inefficiency as resources are not fully utilized.

d) Hawks would prefer point B on the PPF as they want to be strong and therefore produce more guns than butter while Doves would produce at point E as they want more of Butter compared to guns.

e) The party Dove will get more peace dividend as the competitor has reduced production of guns and this implies increased peace.