Question

A nation’s residents can decide to allocate their scarce resources either to producing consumption goods or to producing capital goods. The following table displays the production possibilities for this nation. Use the table to answer questions a-c: a) Suppose that the nation’s residents currently produce combination B. What is the opportunity cost of increasing production of capital goods by 10 units? b) Does the law of increasing opportunity costs hold true for this nation? Why or why not? Explain your answer. c) Which combination – A, B, C or-D - can lead to faster economic growth in the future? Explain your

TABLE

A - 100 UNITS OF consuption good / 0 units of capital goods

b - 97 UNITS OF consuption good/ 10 units of capital goods

c- 90 UNITS OF consuption good/ 20 units of capital goods

d- 75 UNITS OF consuption good/ 30 units of capital goods

Answer 1

The production possibilities are given in the table as follows

Combination	Consumption Good	Capital Goods
A	100	0
B	97	10
C	90	20
D	75	30

a) if the country is producing at B then it is producing 97 units of consumption goods and 10 units of capital goods. It it increases the production of capital by 10 units then to reach C (90 units of consumption good and 20 units of caputal goods) and be on the same production possibility curve it has to forgo 7 units (97-90=7) of consumption goods. Thus the opportunity cost of producing 10 more capital good than point B is 7 consumption goods.

b) yes the opportunity cost of producing capital goods increases as we produce more and more units of capital goods while remaining on th production possibility curve.

From A to B the opportunity cost of producing 10 more capital goods is 100-97=3 consumption goods.

From B to C it is 97-90= 7 consumption goods

From C to D it is 90-75= 15 consumption goods.

We have increasing opportunity cost because resources are limited and are also specialised in production of a specific good so in order to increase the production of one good productive resources are taken out if the good it specialises in so the good from which the resources are taken out falls by some amount. As more resources are taken out of its production to increase the production of the other good its production falls more than before as now specialised resources are taken out of it and in order to increase the production of the other good by the same amount as before more and more resources should be taken out of the good the specialise in and put in use for production of the good they do not specialise in.

c) the combination that produces the ost capital goods can lead to future economic growth because it the capital goods that can be used in future production and have future productive value whereas consumption goods have no future productive value so country should produce at D for faster economic growth in the future.