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 possibilities frontier graph to illustrate the trade-off to an economy between producing consumption goods and producing capital goods. Is it likely that the production possibilities frontier in this situation will be a straight line (as in Figure 2.1 on page 43) or bowed out (as in Figure 2.2 on page 46)? Briefly explain.

In Figure 2.1

In Figure 2.2

b. Suppose a technological change occurs that has a favorable effect on the production of capital goods but not consumption goods. Show the effect on the production possibilities frontier.
c. Suppose that Lichtenstein and Luxembourg currently have identical production possibilities frontiers but that Lichtenstein devotes only 5 percent of its resources to producing capital goods over each of the next 10 years, while Luxembourg devotes 30 percent. Which country is likely to experience more rapid economic growth in the future? Illustrate using a production possibilities frontier graph. Your graph should include production possibilities frontiers for Lichtenstein and Luxembourg today and in 10 years.

Tesla's Production Choices at Its Fremont Plant Quantity of Sedans Produced Choice Quantity of SUVS Produced 80 60 20 40 40 D 20 60 80 Quantity of sedans produced per day A combination that is unattainable with 80 current resources Tesla's production possibilities frontier showing its trade-off between producing 60 sedans and SUVS 40 30 20 Quantity of SUVS produced per day 10 20 40 50 60 80 A combination that is inefficient because not all resources are being used Increasing automobile production by 200 here... Tanks ... reduces tank production by only 50. Increasing automobile production by 200 here... 400 350 .. reduces tank production by 150. 200 200 400 500 Automobiles