Your friend owns a snow cone stand that he works by himself. He ...

[tfester]

Your friend owns a snow cone stand that he works by himself. He produces about 25 snow cones per hour. He wants to be able to produce twice as many snow cones per hour so he buys a second machine.
 
  He notices that he can only produce 10 more snow cones an hour. He jokes that he could have doubled his output with the second machine if he only had four hands. Using your knowledge of the production process, explain to your friend what you think has happened when he added more capital to his production process.

Question 2

Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to
 
  A) execute an open market sale of government securities.
  B) increase marginal income tax rates.
  C) increase government transfer payments.
  D) lower the discount rate of interest.

[Tonyam972]

Answer to Question 1

The second machine does not add as much as the friend thinks it should because of the phenomenon of diminishing returns. He is able to produce more snow cones, but less with the second machine than with the first. This is because as the only worker, he is not physically able to work a second machine as rapidly as he could the first machine. He probably could double output if he added another worker.

Answer to Question 2

C

[tfester]

Excellent

[raili21]

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