ECON 500 Questions for Chapter 2 Questions from the textbook: Review questions 1 and 3 (page 52). Problems 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10 (pages 53-54). Additional problems: 1) Imagine a society that produces military goods (“guns”) and consumer goods (“butter”). The Production Possibilities Frontier for guns and butter is illustrated below. i. In the figure above, identify a point which is impossible for this economy to achieve (label this point “U”). In the figure above, identify a point which can be achieved, but is inefficient (label this point “I”). ii. Suppose the society has two political parties, the Hawks (that want a strong military, but still some consumer goods) and the Doves (that want a smaller military, and more consumer goods). In the figure above: identify a point that the Hawks might argue in favor of (label this point “H”); identify a point that the Doves might argue in favor of (label this point “D”). iii. Suppose that an aggressive neighboring country reduces the size of its military. As a result, both Hawks and Doves reduce their desired level of Guns by the same amount. Which party would realize a bigger “peace dividend,” measured by the resulting increase in butter production. Clearly explain. Guns Butter2) Amanda, Burt, and Carl devote each workday to producing either “donuts” or “English muffins.” On any given day: Amanda can produce either 10 donuts or 40 English muffins; Burt can produce either 30 donuts or 30 English muffins; Carl can produce either 100 donuts or 50 English muffins. i. Which individual has an Absolute Advantage over all others in the production of donuts? Explain. Which individual has an Absolute Advantage over all others in the production of English muffins? Explain. ii. Determine the opportunity cost of an additional donut for each individual. Determine the opportunity cost of an additional English muffin for each individual. iii. Assuming that no exchange can occur, graph the Production Possibilities Curve of each individual. Clearly label each intercept, as well as the slope of this curve at each point. Identify an unattainable, an efficient, and an inefficient point on each graph. iv. Suppose that trade can take place between all three individuals. iv.a. What is the maximum number of donuts that these three individuals can produce collectively? Explain. iv.b. Which individual should produce “the first English muffin”? Explain. iv.c. Graph the Production Possibilities Curve for this “three person economy.” Clearly label each intercept, as well as the slope of this curve at each
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