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.
Question 2:
A key skill in economics is the ability to use the theory of supply and demand to analyze specific markets.
Below are three scenarios in which you will get a chance to demonstrate your ability to analyze the effects of
several “shocks” to the market for coffee. Answer all parts of each of the scenarios.
Scenario 1: Suppose that, as part of an international trade agreement, the U.S. government reduces the tariff
on imported coffee. Will this affect the supply or the demand for coffee? Why? Which determinant of demand or
supply is being affected? Show graphically with before- and after-curves on the same axes. How will this
change the equilibrium price and quantity of coffee? Explain your reasoning.
Scenario 2: Suppose the National Institutes of Health publishes a study finding that coffee drinking reduces the
probability of getting colon cancer. How do you imagine this will affect the market for coffee? Why? Which
determinant of demand or supply is being affected? Show graphically with before- and after-curves on the
same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.
Scenario 3: Combine parts 1 and 2. Suppose that the U.S. government reduces the tariff on imported coffee,
and a reputable study is published indicating that coffee drinkers have lower rates of colon cancer. What will
the combined impact be on the equilibrium price and quantity of coffee? Explain your reasoning and show graphically.
Sample Solution
