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.
FIGURE 12-2
-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 supply curve will shift up to S1 and allocative efficiency will be maintained.
B) 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 Q 2 of butter and point c) 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 price of guns relative to the price of butter) rises and the economy moves to point a) on the PPB.

Question

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.
  FIGURE 12-2
-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 supply curve will shift up to S1 and allocative efficiency will be maintained. 
B) 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 Q 2 of butter and point c) 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 price of guns relative to the price of butter) rises and the economy moves to point a) on the PPB.

Quizplus · Accepted Answer

When there is an increase in demand for butter, the marginal value to consumers of butter becomes greater than the marginal cost to producers. This leads to a rise in the price of butter relative to the price of guns, and the economy moves to output Q2 of butter and point c) on the PPB. This new point represents a more efficient allocation of resources as it generates higher satisfaction for consumers (due to the higher marginal value of butter) and higher profits for producers (due to the higher price of butter). Therefore, choice C is correct. The other options are incorrect because they either involve a shift in the supply curve, a shift back in the demand curve, or a movement to a point that is less efficient than the initial allocative efficient point.

The Production Possibilities Boundary Shows Possible Combinations of Guns and Butter