Question

Production Possibilities Curve 10 9 8 7 6 Investment Goods(units per time) 5 4 3 N 1 0 1 1 3 N 4 5 6 7 8 ON 10 Consumer Goods(units per time)

Answer 1

A. PPF represents the possible combination of 2 goods that can be produced using the given resources and technology. When we move up along the PPF in order to increase the production of investment goods from 4 unit to 8 unit, production of consumer goods will decrease from 7 units to 3 units. So, Opportunity cost of producing additional 4 units of investment goods are 4 units of consumer goods.

b) If investment decreases now, it will affect the stock of capital goods in the future and thus, will reduce the scope of production for both goods. So, PPF will shift inward and production possibilities will decrease.

c) Similarly, when the economy is producing only consumer goods, due to lack of capital goods available in the future scope of production will decrease and Production Possibility Curve will shift leftward.