Economics 121 B & C

Quiz 2

September 22, 1997

Prof. A. D. Becker

 

Name:___________________________

A small country produces military goods and civilian goods. It has the production possibilities frontier (PPF) shown in the graph. The country’s current annual production of 2,000 military goods and 4,000 civilian goods is shown on the graph.

  1. Provide a reasonable estimate of the opportunity cost of civilian goods (in terms of military goods) given the current level of production.

    2. The opportunity cost is the slope of the PPF at the point. It is approximately equal to 1.3. That means that for every one additional unit of civilian goods the country must give up 1.3 units of military goods.

  2. On the graph, show the effect of a grant of foreign military assistance of 2,000 per year.

    3. See the graph.

  3. Suppose the country does not desire to have more military goods but still receives the military aid. How much more civilian goods could it have? Provide a numerical answer consistent with the opportunity cost provided above and show your answer on the graph, too.

If the country wishes to have no more military goods than it has now (2000), it could have 5200 civilian goods: 1200 more than is does now. 2000 military and 5200 civilian is a point on the new PPF.

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