2. Production Possibilities Frontier and Economic Growth. Suppose an economy can

Question

2.   Production Possibilities Frontier and Economic Growth. Suppose an economy can choose to produce either capital or consumption goods. Assume that consumption goods, such as jet skis, are used to satisfy current needs and desires but have no future value – they cannot be used to produce anything in the future, nor can they be re-sold at a future date. Assume that capital goods do not satisfy any current needs or desires, but are used to increase production of all types of goods in the future. The production possibilities frontier below shows the trade-off between consumption (C) and capital (K) goods.

a.   (6 points) Which point or points on the PPF represent efficient production? Briefly explain what it means for production to be efficient, and how you can tell which combinations are efficient based on their position on the graph.

b.   (6 points) Which point or points on the PPF represent inefficient production? Briefly explain why production may be inefficient. How you can tell which combinations are inefficient based on their position on the graph.

c.   (8 points) Which point, A or B will lead to greater economic growth in the future? Briefly, but explicitly, explain your answer – how and why will that point lead to greater economic growth?

Explanation / Answer

a. Point B on the PPF represents efficient production because at this point, more of capital goods are produced that have capability of producing all types of products in the future. Consumption goods, on the other hand, are used to satisfy current needs but has no future value.

b. Point D represents point of inefficiency. The economy is under performing and is not producing to its potential. The country’s resources are not being used efficiently.

c. Points A and B are the two possible production possibilities on the graph. At A, the economy produces more of consumption goods that satisfies current needs but has no future value to the economy and cannot produce anything nor can be resold in the future. Whereas at Point B, more of capital goods are produced, though it doesn’t meet current needs, it can be used to increase production all types of goods in the future, which is quite essential to economic growth. Hence, Point B has the greatest efficiency on the PPP graph.

*****

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.