Question

Why is the economy at point I in Exhibit 1, where it produces 20 units of Consumer Goods and 20 units of Capital Goods, an indication that it has not reached its potential production?

a) Because it lacks the resources to produce more goods.
b) Because it is producing at its maximum capacity.
c) Because it has an oversupply of resources.
d) Because it is operating beyond its PPF.

Answer 1

In Exhibit 1, point I represents an economy that produces 20 units of Consumer Goods and 20 units of Capital Goods. This indicates that the economy has not reached its potential production because it is not operating at its maximum capacity.

Step-by-step explanation:

In Exhibit 1, point I represents an economy that produces 20 units of Consumer Goods and 20 units of Capital Goods. This indicates that the economy has not reached its potential production because it is not operating at its maximum capacity. Option b) Because it is producing at its maximum capacity, is incorrect.

Option a) Because it lacks the resources to produce more goods, is also incorrect. In this case, the economy is producing 20 units of both Consumer Goods and Capital Goods, which suggests that it has the resources to produce more.

Option c) Because it has an oversupply of resources and d) Because it is operating beyond its PPF, are both incorrect because the economy is not producing beyond its production possibilities frontier (PPF) and there is no indication of an oversupply of resources.