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 price of guns (relative to the price of butter) rises and the economy moves to point (a) on the PPB.
B) 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.
C) the supply curve will shift up to S1 and allocative efficiency will be maintained.
D) 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.
E) 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.

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 price of guns (relative to the price of butter) rises and the economy moves to point (a) on the PPB. 
B) 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. 
C) the supply curve will shift up to S1 and allocative efficiency will be maintained. 
D) 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. 
E) 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.

Quizplus · Accepted Answer

An increase in demand for butter would cause the price of butter to rise and lead the economy to move along the production possibilities boundary (PPB) to a point where the output of butter is higher (Q2) and the output of guns is lower. This would happen because the marginal value to consumers of butter is greater than the marginal cost to producers, leading to an increase in the price of butter relative to the price of guns. This shift would result in a movement from point (a) to point (c) on the PPB. Allocative efficiency would be maintained because the marginal benefit equals the marginal cost at point (c). The supply curve may or may not shift, depending on the specific conditions of the market.

The Production Possibilities Boundary Shows Possible Combinations of Guns and Butter