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Difficulty: HardBasic Economic Problems of Society

A developing economy characterized by a high rate of unemployment and scarce foreign currency reserves must decide whether to construct its major highway network using manual labor with simple tools or imported heavy machinery. Which basic economic problem of society is this nation attempting to solve, and what is the primary economic factor determining its choice?

  1. How to produce, determined by relative factor availability and cost.Answer
  2. B
    What to produce, determined by market price signals and consumer preferences.
  3. C
    For whom to produce, determined by the distribution of national income among citizens.
  4. D
    How to produce, determined strictly by the absolute financial budget spent on equipment.

Answer

How to produce, determined by relative factor availability and cost.
The decision to use manual labor versus heavy machinery addresses the technique of production ('How to produce'). In economics, the optimal technique is dictated by relative factor prices and resource endowments, allowing the society to produce efficiently given its resource constraints.

Step-by-Step Solution

1
Identify the nature of the economic decision presented in the scenario.
The scenario describes choosing between manual labor (labor-intensive) and heavy machinery (capital-intensive) techniques to build highways.
Choosing the combination and proportion of resource inputs (labor vs. capital) constitutes the fundamental problem of 'How to produce'.
2
Determine the underlying economic principle governing optimal production technique selection.
Economies select production techniques based on relative factor endowments (abundance/scarcity) and relative factor prices to minimize opportunity cost.
An economy rich in labor and poor in capital minimizes real cost by using labor-intensive methods.

Key Concept

Basic Economic Problems of Society - How to Produce
Estimated Time:2m 0s
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Topics

Basic Economic Problems of Society

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