The Production Possibilities Boundary Shows Possible Combinations of Guns and Butter

question 46

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 (a) on the production possibilities boundary. Is this output of guns and butter allocatively efficient?

• A) No, because the marginal value to consumers of the butter produced is greater than the marginal cost to producers.
• B) Yes, because the marginal cost of producing the butter equals the marginal value of consuming the butter.
• C) No, because the marginal cost to producers of the butter produced is more than the marginal value to consumers.
• D) No, because the marginal costs for guns and butter are not equated.
• E) Yes, because all points on the production possibilities boundary are allocatively efficient.

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