Q1: Imagine a society that produces military goods and consumer goods, which we’ll call “guns”

and “butter.” [2 Marks]

• Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape.
• Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
• Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose.
• Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger “peace dividend,” measured by the increase in butter production? Explain.

Q2: Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a

year. [2 Marks]

• What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.
• Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million
• Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

cars, how much wheat can it consume without trade? Label this point on the production

possibilities frontier.

Q3: Suppose the demand function for corn is Qd = 10 − 2p, and supply function is Qs = 3p − 5. The

government is concerned that the market equilibrium price of corn is too low and would like to

implement a price support policy to protect the farmers. By implementing the price support

policy, the government sets a support price and purchases the extra supply at the support price.

In this case, the government sets the support price ps = 4. [1 Mark]

• Calculate the original market equilibrium price and quantity in absence of the price
• At the support price ps = 4, find the quantity supplied by the farmers, the quantity

support policy.

demanded by the market, and the quantity purchased by the government.