An economy that invests in additional factories and equipment
A. moves along its PPF and incurs an opportunity cost
B. experiences economic growth but incurs an opportunity cost
C. does not incur an opportunity cost
D. moves along its PPF until opportunity cost is zero
The correct answer and explanation is:
The correct answer is B. experiences economic growth but incurs an opportunity cost.
When an economy invests in additional factories and equipment, it is engaging in capital formation, which contributes to economic growth. This growth happens because the economy is increasing its productive capacity, enabling it to produce more goods and services in the future. However, this type of investment comes with an opportunity cost.
Opportunity cost refers to the value of the next best alternative that must be forgone when a decision is made. In the context of an economy investing in factories and equipment, the opportunity cost arises because resources (such as labor, capital, and raw materials) are being redirected toward these investments rather than being used for other immediate purposes. For example, the resources could have been used to produce consumer goods or services that meet the current needs of the population. By choosing to invest in capital goods, the economy sacrifices some of its present consumption.
This situation also reflects a movement along the production possibilities frontier (PPF). The PPF is a curve that shows the maximum feasible output combinations of two goods that an economy can produce, given its resources and technology. When an economy allocates resources to investment rather than consumption, it moves along the PPF. However, this movement is associated with an opportunity cost, as the production of some goods is sacrificed to increase the capacity for future production.
Thus, while the economy may experience growth in the long run due to increased investment, it incurs a short-term opportunity cost because it is sacrificing current consumption to build for the future. This trade-off is a fundamental characteristic of economic decision-making.