FIGURE 12- 2 the Production Possibilities Boundary Shows Possible Combinations

question 82

Multiple Choice

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.

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Definitions:

Salespersons' Commissions

This refers to the payment made to sales staff based on a percentage of the sales they generate, as a form of incentive and reward.

Product Cost

The total expenditure incurred to produce, acquire, and sell products, including direct materials, direct labor, and overhead.

Period Cost

Overheads not directly linked to production, charged as expenses in the timeframe they happen.

Direct Materials

The raw materials directly used in the manufacturing of a product, easily traceable to the finished good.