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Question 4: Suppose we can divide all the goods produced by an economy into two types...

Question 4: Suppose we can divide all the goods produced by an economy into two types : consumption goods and consumer goods. Capital goods such as machinery, equipment, and computers, are goods used to produce other goods.

  1. Use a production possibilities frontier graph to illustrate the trade-off an economy between producing consumption goods and producing capital goods. Is it likely that the production possibilities frontier in this situation would be a straight line or a bowed out? Briefly explain.   
  2. Suppose technological change occurs that has a favorable effect on the production of capital goods. Show the effect on the production possibilities frontier.
  3. Suppose that country A and country B currently have identical production possibilities frontiers but that country A devotes only 5 percent of its resources to producing capital goods over each of the next 10 years, whereas country B devotes 30 percent. Which country is likely to experience more rapid economic growth in the future? Illustrate using the production possibilities frontier graph. Your graph should include production possibilities frontier for country A today and in 10 years and the production possibilities frontiers for country B today and in 10 years.

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