Chapter 3, Problem 1FRQ

a)

To determine

The question requires us to determine the opportunity costs of the production possibilities curve (PPC).

Answer to Problem 1FRQ

Yes, the production possibilities curve exhibits increasing opportunity costs.

Explanation of Solution

Yes, the production possibilities curve of this country displays increasing opportunity costs because the opportunity cost of producing each additional unit of butter in terms of military goods is increasing. Similarly, the opportunity cost of producing each extra unit of military goods in terms of butter is increasing.

b)

To determine

The question requires us to determine the impact of war on the allocative efficiency of the PPC and label the new allocative efficient point.

Answer to Problem 1FRQ

Point B, the economy will move from C to point B during the war.

Explanation of Solution

During the war, the demand for military goods increased. So, the production of military goods rises while maintaining the basic level of social goods such as butter. The efficient allocative point at the production possibilities curve is point B. At this point, the economy is producing more military goods and less social goods.

c)

To determine

The question requires us to determine the movement of the bundle during the recession.

Answer to Problem 1FRQ

Point E; during the recession, the country will move to point E from point C.

Explanation of Solution

During the recession, the supply and demand for goods fall and cause the producer to lower its production. Thus, the country will move to point E from point C during the recession.