Economics: Theory and Practice, 10th Edition

Answers to “Test Your Understanding”

Chapter 1

The economy's production possibilities curve is shown by the solid line in the figure accompanying these answers.

1. Twelve million units of capital goods (capital goods decreased from 32 to 20 million units); 10 million units of consumer goods (consumer goods decreased from 10 million units to zero).
2. Point A is slightly to the left of the production possibilities curve, and point B is further to the left than point A.
3. The location of point C depends on how one views the relative importance of capital goods and consumer goods. Point C will be closer to the horizontal axis if capital goods are considered to be relatively more important, and closer to the vertical axis if consumer goods are considered to be relatively more important. Students put point C on the curve based on their opinions about the relative importance of capital goods and consumer goods.
4. If only consumer goods were produced, no machinery or equipment would be produced to replace what is currently being used, and future production would be adversely affected. If only capital goods were produced, there would be nothing to sustain people currently.
5. The production possibilities curve would shift to the right as illustrated by the lighter line in the accompanying figure.

   

Chapter 2

1. 1. pure market
   2. pure planned
   3. mixed
   4. pure market
   5. pure planned
   6. mixed
2. 1. Flow of money from households ...