The figure given below shows the production possibilities frontier for capital g
ID: 1147346 • Letter: T
Question
The figure given below shows the production possibilities frontier for capital goods and consumption goods Identify the correct statement. Figure 2.7 Consumption goods 0 Capital goods O Economic growth will allow the economy to produce at a point that lies on a higher production possibilities frontier If the economy is initially at point b, an increase in capital stock will lead to a movement to point c. If the economy is initially at point c, an increase in capital stock will lead to a movement to point b. If the economy is initially at point a, an improvement in the rules of the game will lead to a movement to point . Economic growth will allow the economy to produce at a point that lies on a lower production possibilities frontierExplanation / Answer
Answer:
According to production possibility figure given in the question the correct statement is: "If the economy is initally at point b, an increase in capital stock will lead to a movement to point c."
Explanantion:
This statement is correct because the production possibility frontier curve (PPF) depicts the possibility of two goods when other resources are constant. That is production of one commodity can only be done when the production of other commodity is to reduce. Here the two goods are capital and consumption goods. So to produce more of captial good, the economy has to reduce the consumption good (which is shift from point b to point c).
The other statement like shift from point c to point b is not possible because for shifting upwards the capital goods have to reduced in order to increase the consumption good.
Another feature about PPF is that no point above graph is possible and the point below PPF is inefficient. hence the first and last statement given is wrong. As the economy has already used all resources and is left between these two good (consumption and capital) there is no way it can move away from the present PPF curve either inward or outward. Hence the statements are wrong.