Chapter 2, Problem 2PA Problem Imagine a society that produces military goods and consumer goods, which we'll call "guns" and "butter" a. Drawa 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 tne society nas two political par-tles, called the Hawks (wno want a strong military) ang the Doves (who want a smaller military). Show a point on your production possibillties frontier that the Hawks might choose and a point the Doves might choose 4. Imagine that an aggressive neighboring country reduces the se of ils military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Much party would get the bigger "peace dividend," measured by the increase in butter Production? Explain Step1 Comments (1) [7 Anonymous You can't seo anything Step2 (a) ‘The production possibility frontier (PPF) depicts the trade-off among the outputs of different goods at a given time. ‘The following graph shows the production possibility frontier for guns and butter: Y Producti possil F frontier Quantity of Guns 300 600 700 1000 Quantity of butter steps ‘The opportunity cost of butter, in terms of the number of guns, depends on how much butter and how many guns the economy is producing, In the above figure, the opporturity cost of butter is highest, when the economy is producing more butter and fewer guns. itis seen at point E, where the frontier is steep; this is because, the workers and machines best suited for making guns are being used to make butter, therefore, each unit of gun given up creates a small increase in the production of butter. ‘When the economy is producing less butter and more guns, at point F. the frontier is flatter in length and the opportunity cost of butter is lower. This is because, the workers and machines best suited to making butter are being used to make guns, therefore, each unit of gun given up, creates a laige Increase In the production of butter. Thus, the production possibilities frontier is flat ‘Therefore, the fatter trontier retlects tne shape of the production possibilities. step4 (b) Impossible point: In the following figure, point C is impossible to achieve because, the economy does not have enough resources to support that level of output Production i possibilities PapsSoine: frontier 2200 2000 Quantity of Guns 1000 }-------¢D 1 0 300 600 700 1000 Quantity of butter Feasible but Inefficient point: Point D in the following figure, though feasible, is inefficient because, the economy is not fully utilizing the available resources, ie. it is producing less than what it could produce. If the ‘economy moves from point D to point A, it can produce more of both the products. Production possibilities FE frontier S 3 m 8 Feasible & Inefficient & x 1000 f------~"9D 1 4 E 0 300 600 700 1000 Quantity of butter step 5 () ‘As shown in the following figure, Hawks, who wants a strong military, would choose a point F: on the other hand, Doves, who wants a smaller military, would choose a point E on the production possibility frontier. y [Hawhks| Production possibilities FE frontier 3000 2200 2000 Quantity of Guns 1000 0 300 600 700 1000 Quantity of butter Step 6 (a) If both Hawks and Doves reduced their desired quantity of guns by the same amount, the Hawks gets a bigger peace dividend This is because the production possibilities frontier is flat at point F than at point E. Therefore, the reduction of a given number of guns, starting at point F, leads to a much larger increase in the quantity of butter produced than when starting at point E This can be illustrated by the following figure, by assuming that the Hawks are producing at point F and Doves at point B. y y= Production possibilities E frontier 3000 g 2 & 2200+ + o 3° 2 2000 é 1000 Doves) 0 x 50 300 600 700 950 1000 Quantity of butter If Hawks reduce their guns by 1,000 units, i.¢. from 3,000 to 2,000 then the increase in butter will be from 50 units to 700 units - an increase of 650 units. On the other hand, if Doves reduce their gun consumption by 1000; i.e. from 2000 to 1000 Units, then the increase in butter will be from 700 units to 950 units - an increase of 250 units. Thus, the Hawks gets a bigger peace dividend.