Question

7. Country A produces fewer capital goods and more consumer goods than Country B (meaning, Country B produces more capital goods and fewer consumer goods). Which country’s economy will have more rapid growth? Draw two production possibilities curves to demonstrate your answer.

8. Imagine a production possibilities curve between Blu-ray players and Dolby speakers. How is the PPF affected when a technological breakthrough increases the efficiency of the production of Dolby speakers?

Answer 1

7.

Country B will have more rapid growth than that of country A, Because country B makes more investments in capital goods. A higher investment in capital goods, leads to higher productivity, development of new technologies and innovation. As a result, a higher growth rate is achieved in country B.

In contrast to it, country A will spend most of its resources to spend on consumption by producing consumption based goods. It is due to the larger population. Hence, less resources will be available for investment on research & development and capital goods production. So, growth rate in country A slows down. It is shown by the PPF curve as follows.

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