Question

1. In this assignment, you will demonstrate your ability to draw a simple production possibilities curve given data on the quantity of one input (labor) and the amount of labor required to produce each of two outputs (guns and butter). You should also be able to identify the opportunity cost of one good in terms of the other as the slope of the PPC. You will explain your analysis of the figures to explain why it’s not possible to produce combinations of the two goods outside the PPC.

   Guns or Butter?

   Suppose a nation has a total of 12 units of labor, which can be used to produce either guns or butter. One gun takes 6 units of labor to produce and 1 butter takes 2 units of labor to produce.

   • Explain why scarcity exists in this economy. Use the data as evidence of your reasoning.
   • What is the maximum quantity of guns that can be produced?
   • What is the maximum quantity of butter than can be produced?
   • Draw the nation’s production possibility curve.
   • What is the opportunity cost of guns in this nation?
   • Explain why the nation can’t produce both 3 guns and 4 butters.
   • Explain why the nation shouldn’t produce both 1 gun and 2 butters.

Answer 1

Here the nation has only 12 units of labour thus there is a scarcity of factor of production thus the nation can not produce as much as gun and butter they want , there is always an opportunity cost due to the scarcity of factor of production.

The maximum quantity gun can be produced when economy will not produce butter at all thus the maximum gun can be produced is 2 using 12 units of total labour as one gun takes 6 units of labour

Similarly, the maximum number of butter can be produced when the nation will not produce gun at all , thus the maximum number of butter is 6 as each butter takes 2 units of labour

Buttern ĐiPf Combo g 2. Taking 12units of labour Guin and butters 6. thus the PPe will be Buttur OC3,4). /3) (1,2) 2 3 4 5 6

The opportunity cost of one gun = (6-3)/(0-1)= 3 units of butter

Nation can not produce 3 guns and 4 butter as the units of labour needed is more than 12 thus this bundle belongs the above of the PPC which is unrealistic

similarly , the nation should not produce ! gun and 2 butters because after producing this bundle there will be excess labour thus it is not optimizing bundle , it belongs to below the PPC