4. Suppose an economy can produce physical capital goods and consumption goods. Currently, the economy is employing all of its resources to produce a combination of physical capital goods and consumption goods. a. Explain what is the economyâs opportunity cost of increasing its production of physical capital goods. b. Explain what is the economyâs long run benefit from increasing its production of physical capital goods. c. Explain how increasing the production of physical capital goods today would impact the economyâs production possibilities curve in the future.

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Collen VonLv2

4 Apr 2019

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Q1. The following table shows the relationship between outside temperature (T) and number of hot drinks sold (Q).

Outside temperature (T)	Number of hot drinks sold(Q)
0 ⁰F	1000 cups
20	900
40	800
60	700
80	600

a. Graph and briefly explain the relationship. Put the number of hot drinks sold (Q) on the vertical axis and outside temperature (T) on the horizontal axis.

b. Compute the slope of the line? Y-intercept? Show your work.

c. Construct the equation that represents this line. Predict the number of hot drinks sold (Q) at 26 ⁰F. Show your work.

Q2. Discuss the opportunity costs of the following cases, respectively.

a .Go to the movie theater and watch a movie instead of studying for a midterm exam.

b .Suppose that an economyâs PPF is a straight line, rather than a concave curve. What would this say about the nature of marginal opportunity cost as production is shifted from one good to the other?

Q3. Dreamlandâs production possibilities schedule is as follows:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

POINT	Capital Goods	Consumption Goods
A	0	30
B	2	27
C	4	21
D	6	12
E	8	0

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

a. Draw the production possibilities frontier. Put Capital Goods on the horizontal axis and Consumption Goods on the vertical axis.

b. If this economy is at point C, what is the opportunity cost of one more capital good (i.e., marginal opportunity cost)?

c. Can Dreamland produce 6 capital goods and 21 consumption goods? Explain.

d. Suppose that Dreamland has two possible choices in the future: it devotes only 5% of its resources to producing capital goods over each of the next 10 years, whereas it devotes 20%. In which case is Dreamland likely to experience more rapid economic growth in the future? Explain your reasoning.

Suppose an economy produces only two goods, consumer goods, and capital goods. Its current combination of production involves a higher level of capital goods than consumer goods. What can be inferred from this current choice on its production possibilities curve?

That its ____ choice in production may result in ____ future prospects for economic growth.

lilacprairie-dog904

19 Suppose the U.S. is producing on its concave to the origin (bowed out) shaped production possibilities frontier (curve). The PPF is defined over capital goods and consumption goods. At its current point of production the opportunity cost of 1 billion units of capital goods is 2 billion units of consumption goods. Suppose the U.S. increases its capital goods production by 5 billion units. The opportunity cost will be A. less than 10 billion units of consumption goods. B. uncertain; it could be more than, or less than or equal to 10 billion units of consumption goods. c. zero since this will increase the country's resources. D. more than 10 billion units of consumption goods. E. 10 billion units of consumption goods.