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(Figure: Production Possibilities and Circular-Flow Diagram) Assume the accompan

ID: 1248776 • Letter: #

Question

(Figure: Production Possibilities and Circular-Flow Diagram) Assume the accompanying figures represent the same economy. Suppose that in the circular-flow diagram there is a significant increase in the amount of productivity that is occurring inside most of the firms. This results in a significant increase in the output of both coconuts and fish. If all other variables remain unchanged, then the adjustment in this economy would be best represented in the production possibilities figure by a movement from point A toward: Choose one answer. point A (no movement would occur). point 6 (an increase in fish production), point C (a decrease in coconut production). point D (an outward shift of the entire curve).

Explanation / Answer

The correct answer is D. Currently, D is infeasible. We can tell that visually because d is outside the curve. However, if productivity increases, the curve will shift outward toward D, so that D may become feasible.

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