Limits, Alternatives, and Choices: Economic Problems

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Problem A

Below is a production possibilities table for consumer goods (butter) and capital goods (guns).

Production Possibilities

Type of Production Production Alternative A Production Alternative B Production Alternative C Production Alternative D Production Alternative E Production Alternative F Production Alternative G
Butter 0 1 2 3 4 5 6
Guns 14 13 11 9 7 4 0

Graph the data in the table using Excel. Then, answer the following questions:

  1. What are the specific assumptions that underlie the production possibilities curve?
  2. What would be the cost of more butter, if the economy is at point C? What would be the cost of producing more guns? How does the shape of the production possibilities curve reflect the law of increasing opportunity costs?
  3. Suppose this hypothetical economy were producing only 1 item of butter and 10 guns, and this was depicted by this production possibilities table and curve. What conclusions could you draw about this economy’s resource utilization?
  4. Can this economy produce outside its current production possibilities? How can technological changes affect the production possibilities curve? How can international trade permit consumption above its production possibilities curve?

Problem B

  1. What is an opportunity cost?
  2. How does this concept relate to the definition of economics?
  3. Which of the following decisions would entail the greater opportunity cost: allocating advertising expenditures to boost sales—or investing in a new plant and equipment? Explain.

Problem C

Cite four examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.

Resources:

  • Ahleresten, K. (2008). Essentials of microeconomics. London, GBR: Bookboon.
  • Jochumzen, P. (2010). Essentials of macroeconomics. London, GBR: Bookboon.