FIGURE 12- 2 The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country.The lower diagram shows demand and supply for butter.

-Refer to Figure 12- 2.Suppose this economy is allocatively efficient at Q1 units of butter.Now suppose there is an increase in demand for butter from D to D1.After this shift in demand,
A)the marginal value to consumers of butter is less than the marginal cost to producers; the price of butter (relative to the price of guns)rises; the economy moves to output Q2 of butter and point (c)on the PPB.
B)the price of guns (relative to the price of butter)rises and the economy moves to point (a)on the PPB.
C)the marginal value to consumers of butter is greater than the marginal cost to producers; the price of butter (relative to the price of guns)rises; the economy moves to output Q2 of butter and point (c)on the PPB.
D)the increase in the price of butter (relative to the price of guns)will cause the demand curve to shift back down to D and allocative efficiency will be maintained.
E)the supply curve will shift up to S1 and allocative efficiency will be maintained.

Question

FIGURE 12- 2 The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country.The lower diagram shows demand and supply for butter.
 
-Refer to Figure 12- 2.Suppose this economy is allocatively efficient at Q1 units of butter.Now suppose there is an increase in demand for butter from D to D1.After this shift in demand,
A)the marginal value to consumers of butter is less than the marginal cost to producers; the price of butter (relative to the price of guns)rises; the economy moves to output Q2 of butter and point (c)on the PPB. 
B)the price of guns (relative to the price of butter)rises and the economy moves to point (a)on the PPB. 
C)the marginal value to consumers of butter is greater than the marginal cost to producers; the price of butter (relative to the price of guns)rises; the economy moves to output Q2 of butter and point (c)on the PPB. 
D)the increase in the price of butter (relative to the price of guns)will cause the demand curve to shift back down to D and allocative efficiency will be maintained. 
E)the supply curve will shift up to S1 and allocative efficiency will be maintained.

Quizplus · Accepted Answer

When there is an increase in demand for butter from D to D1, the marginal value to consumers of butter is greater than the marginal cost to producers. This implies that the price of butter(relative to the price of guns)will rise and the economy will move from output Q1 of butter to Q2, and point (c) on the PPB. This represents an inefficient allocation of resources as the economy is producing more butter than guns than it is capable of producing, and hence, will not be on the PPB.

FIGURE 12- 2 the Production Possibilities Boundary Shows Possible Combinations