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 demand and supply for butter are shown by D and S,respectively.And suppose the economy is at point (a)on the production possibilities boundary.How can this economy move toward allocative efficiency?

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 demand and supply for butter are shown by D and S,respectively.And suppose the economy is at point (a)on the production possibilities boundary.How can this economy move toward allocative efficiency?

Quizplus · Accepted Answer

To move towards allocative efficiency, the economy needs to produce at a point where the marginal benefit of producing one good is equal to the marginal cost of producing that good. At point (a), the economy is producing an equal amount of guns and butter, but it may not be the point of allocative efficiency. To move towards allocative efficiency, the economy should produce more butter and less guns, as shown by the movement towards point (b) on the production possibilities boundary. This is because the demand for butter is higher than the supply, which implies that the marginal benefit of producing more butter is higher than the marginal cost.

FIGURE 12- 2 the Production Possibilities Boundary Shows Possible Combinations