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 (i.e. bows out from the origin).

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.