Question

Most advanced nations have both agricultural sectors and armaments industries. They do not completely specialize in one industry or the other; but generally produce some of both commodities. (a) State the principle of increasing marginal opportunity cost. (b) Is this incomplete specialization consistent with the principle of increasing opportunity costs? Explain your answer in the context of the tradeoff between guns and butter.

Answer 1

a) The principle of increased marginal cost says that with limited resources in the nation every additional unit of one good we gave up the less of the other good we get. For example, according to the scenario given above if we are choosing between guns and butter the more we go on giving up guns to produce butter, after a point, we get less and less of butter on every unit of gun sacrificed.

b) Yes, this incomplete specialization is consistent with the increasing opportunity cost. The developed nation has reached a point where if they gave up more butter they will get a very less additional unit of guns. So, to employ resources in an efficient way they will produce both guns and butter.