28 Assignment Solution: Guns or Butter?

This assessment asked students to assume that a nation has 12 units of labor, which can be used to produce either guns (requiring 6 units of labor for each) or butter (requiring 2 units of labor for each).

If all the labor was used to produce guns, the nation could produce a maximum of 12/6 = 2 guns. Of course, that would leave no labor to produce butter. If all the labor was used to produce butter, the nation could produce a maximum of 12/2 = 6 butters. But then the nation would have no guns.

More likely, the nation would divide its labor between guns and butter. This production possibilities frontier (or curve) can be drawn on a set of axes where the horizontal axis shows butter and the vertical axis shows guns. The PPC is the line from (0, 12) to (6, 0).

Since resources (labor) are limited in this economy, there is a limit on the amount of guns and butter that can be produced. In other words, scarcity exists beyond the PPC. The slope of the PPC always shows the trade off between guns and butter. The trade off in this case is 3 butters for every gun. Economists call this trade off the opportunity cost, since if you choose one more gun, you give up 3 butters.

This economy is limited to producing combinations of guns and butter inside the PPC. For this reason, the nation cannot produce the combination of 3 guns and 4 butters since that would require more than 12 units of labor to achieve. It would be wasteful to produce the combination of 1 gun and 2 butters since that would leave 2 units of labor unused (unemployed). This is called productive inefficiency.