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Problem #1: Describe some of the trade-offs faced by each of the following:

a. A family deciding whether to buy a new car

b. A member of Congress deciding how much to spend on national parks

c. A company president deciding whether to open a new factory

d. A professor deciding how much to prepare for class

e. A recent college graduate deciding whether to go to graduate school

Problem #2: Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.”

a. 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.

b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.

c. 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 that the Doves might choose.

d. 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.