The Production Possibilities Boundary Shows Possible Combinations of Guns and Butter

question 22

Multiple Choice

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 demand and supply for butter are shown by D and S, respectively. And suppose the economy is at point b) on the production possibilities boundary, producing Q1 units of butter. We can say that this economy is efficient because .

• A) allocatively; guns and butter are both produced to the point where the marginal cost to producers equals the marginal value to consumers
• B) productively; the marginal cost of production across guns and butter is equated
• C) allocatively; the price of guns is equal to the price of butter
• D) productively; the economy is operating at a point inside the production possibilities boundary
• E) allocatively; the economy is operating at a point on the production possibilities boundary

Grasp concepts related to household production and the differentiation between private goods and public goods.

Understand the role and impact of household production decisions in response to taxation.

Comprehend the objectives of elected officials and the concept of the public interest.

Recognize the government's role in promoting competition and managing natural monopolies.

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Definitions:

Base Year

A reference point in time used for comparative purposes, particularly in the context of economic and financial indices.

Consumer Price Index

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care, changing over time.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy, indicating how much of the change in the gross domestic product can be attributed to changes in the price level.

Substitution Bias

A phenomenon where consumers alter their consumption preferences in response to relative price changes, potentially misrepresenting inflation measurements.