Question

National Defense (X) 4. Suppose the production possibilities frántier of the United is represented above. In this model, the U.S. is assumed to produce two goods, national defense (X) and health care (Y). a. Which of the three goods combinations (A, B, or E) best represents the current production levels of the U.S. economy? Explain? b. Would the opportunity cost of national defense be higher if the economy were operating at point C or at point D? Explain. c. Suppose the U.S. economy was currently operating at point B. What strategy could it undertake in order to be able to produce and consume the goods combination represented by point E? Explain. Food 988 5

Answer 1

a) Currently the US economy is producing at the point B. As the point E is above the PPF it is unachievable with current resources. Point A is inefficient that indicates wastage of resources. At point B the economy is most efficient.

b) IF the economy was operating at point D, the opportunity cost for national defense will be much higher, that means we have to give up a higher amount of heathcare to produce higher defense goods in the economy.

c) To produce and consume at E it will take more resources it can come from more capital in the economy, more labor or new research and development. As E is at a higher level than the current PPF which represents the maximum the economy can achieve at a current resource level.