Worksheet 3.

1 / PPC - Ali Shahrouri

Analysis: The government has a surplus of $100 Billion they have two options either to invest the funds in education or national defense. Answer the following questions using the PPC curve. NOTE: YOU MAY USE ONE PPC for the question 1-3, however question four you will need to create a new PPC curve to answer the question.

100

Education

100

National Defense

1. Assume that the government decided that only 80% of the money should be spent on defense. Plot a point on the PPC that shows the outcome of this choice. a. What is the opportunity cost of spending less on defense? /1 mark b. What is the benefit of spending less defense? /1 mark 2. The government decides to spend $30 billion on defense and $40 billion on education. Plot this combination on the PPC. a. Describe the point you have drawn on the graph /1 mark.

b. Is this a desirable combination of the two goods for the US to choose? Why or why not / 2 marks 3. The government decides to spend $80 billion on defense and $50 billion on education. Plot this combination on the PPC above. a. Describe the point you have drawn on your graph. /1 mark b. Is the US government able to achieve this point? If not, why not? If so, how? / 2 marks 4. Now assume budget surplus was smaller than anticipated, and the government has only $50 billion of new funds to allocate towards education and defense. a. Draw a new PPC showing the possible combinations of the two goods the US can produce. / 2 marks b. What has happened to the countrys PPC? / 1 mark 5. How does the PPC model demonstrate the following basic economic concepts: /5 marks a. The basic economic problem? b. Opportunity costs? c. Tradeoffs? d. Efficiency? e. Inefficiency? FOUR MARKS ARE RECEIVE FOR CLEARLY LABELLED PPC DIAGRAM AND THE OVERALL ORGANIZATION AND CONSTRUCTION OF YOUR ASSIGNMENT.

TOTAL MARKS / 20