Question 1

TABLE 1 contains the production possibilities data for capital goods and consumer goods in the economy of New Harmony.

A B C D E

Capital goods 0 8 14 18 20

Consumer goods. 30 27 21 12 0

a) Draw the production possibilities curve for New Harmony. Label it PP1. Label each of the five output combinations with the letters A through E. Label consumer goods on the vertical axis and capital goods on the horizontal axis.

b) Assume people of New Harmony have decided to produce 12 units of consumer goods. How many units of capital good could be produced?

c) Assume that the people of New Harmony have decided to produce 11 units of capital goods. Approximately (And I know it doesn't line up perfectly but make an educated guess) how many units of consumer goods can be produced?

d) What is the opportunity cost of the first 14 capital goods produced?

e) Assuming the economy is producing at point C, what is the cost of 6 additional consumer goods?

f) Discuss what law applies here? (Hint: Why is the Production Possibilities Curve downward)

g) Discuss the importance of scarcity, choice and opportunity cost for decision-making purposes