Question

The data in the table below are for the small country of Xanadu. Assume that the economy is originallly producing combination C.

	A	B	C	D	E	F
Capital Goods	0	20	28	35	39	41
Capital Goods 2
Consumer Goods	25	20	15	10	5	0

Answer 1

The table shows different combinations of the Capital goods and Consumer goods in a small country Xanadu.

From the table we can construct the Production Possibility Frontier (PPF) of the country as shown below-

In the graph we can see the PPF of Xanadu. Now if we assume that the economy is originally producing combination C where it produces 28 units of capital goods and 15 units of consumer goods. This shows that now the economy is on the path of economic development and hence thinking for the future they are producing more capital goods which can be used to increase the production of consumer goods in the future.

We can also see from the graph that if the economy moves to the either side i.e. to point B or D, the opportunity cost of consumer goods in terms of capital goods is high which means that we have to give up more capital goods to produce one unit of consumer good.