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 Q₁units 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 Q₂ 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

Quizplus · Accepted Answer

When demand increases from D to D1, the marginal value to consumers becomes greater than the marginal cost to producers, leading to a rise in the price of butter relative to guns. The economy adjusts to a new allocatively efficient output level, Q2, at point (c) on the PPB.

The Production Possibilities Boundary Shows Possible Combinations of Guns and Butter