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

a. Use a production possibility frontier graph to illustrate the trade-off to an economy between producing consumption goods and producing capital goods. Briefly explain why the curve is likely to be concave.

b. Suppose that a technological advance occurs that affects the production of capital goods but not consumption goods. Show the effect on the production possibility frontier.

c. Suppose that country A and country B currently have identical production possibility frontiers, but that country A devotes only 5 per cent of its resources to producing capital goods over each of the next 10 years, whereas country B devotes 30 per cent. Which country is likely to experience more rapid economic growth in the future? Illustrate using a production possibility frontier graph. Your graph should include production possibility frontiers for country A today and in 10 years, and for country B today and in 10 years.