rchat a country with a market economy produces capinal goods and comsumer goods
ID: 1155000 • Letter: R
Question
rchat a country with a market economy produces capinal goods and comsumer goods ne the roduction possibilities curve for that country: (5 points) 50 40 30 20 10 20 40 60 80 100 a) Assuming that the country is using its resources efficiently, what is the opportunity cost of b) Does the "law" of increasing opportunity cost apply in the production of capital goods? c) Discuss, in a general way, how markets would determine the combination of consumer goods d) Discuss some reasons why markets may fail to produce the best combination of these two e) List reasons that may cause the production possibilities curve to shift. (4 points) producing 10 more capital goods when the country is already producing 30 capital goods? Explain. (5 points) Explain. (5 points) and capital goods to produce. (5 points) goods. (6 points)Explanation / Answer
a) when it is producing 30 capital goods it is producing 40 units of consumer goods and when it produces 10 more units of capital goods that is 30+10 = 40 then it will produce 20 consumer goods. Thus producing 10 more capital goods will make it to let go productionn of 40-20 = 20 units of consumer goods. Hence opportunity cost of producing 10 more capital goods is 20 consumer goods
b) When country produces 30 of capital goods and wants to produce 10 more units of it then it will have opportunity cost of 20 consumer goods.
When it wants to further produce 10 more units of capital goods that is total of 50 units of capital sgoods then it will prdoyce 0 consumer goods that isopportunity cost will be 20 - 0 = 20
See that at both level the opportunity cost is same that is 20 units of consumer goods hence its opportunity cost is constant not increasing.
c) The country will decide the combination of units of consumer and capital goods production at the point where the budget constraint will be tangennt to the production curve.
d) The country might not produce the best combination because of inflexibility of resources from one industry to another or may bebecause of market failures like free rider problem etc.
e) The PPC may shift upward due to improvement in technology that will allow more production of commodities using the same level of resources. Another upward shift may take place when economy grows and have more resources to utilize.
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