The question asks to identify which economic decision relates to the fundamental problem of 'what to produce'. Economics deals with how societies manage their scarce resources to satisfy unlimited wants. This involves answering three basic questions: what to produce, how to produce, and for whom to produce.

'What to Produce' Decision Explained

The 'what to produce' decision involves determining which goods and services an economy will create. Given that resources (like labor, land, and capital) are limited, society cannot produce everything. Therefore, choices must be made about the specific combination of goods and services to be produced.

Analyzing the Options

Let's examine each option in the context of the fundamental economic questions:

• Option 1: Choosing between capital and consumer goods: This option directly addresses the 'what to produce' question. Capital goods (like machinery, factories) help in producing other goods in the future, while consumer goods (like food, clothing) satisfy immediate needs. Deciding the proportion of resources allocated to producing capital versus consumer goods is a core 'what to produce' choice. For example, an economy must decide whether to invest more in building new factories (capital goods) or producing more cars for people to buy (consumer goods).
• Option 2: Increasing taxes to raise government revenue: This relates to government fiscal policy and public finance. While it impacts the economy, it doesn't directly define *what* goods and services are produced in the broader sense, but rather how government activities are funded.
• Option 3: Deciding on distribution of output: This refers to the 'for whom to produce' question. It concerns how the goods and services produced are distributed among the members of society – who gets to consume what.
• Option 4: Choosing method of production: This relates to the 'how to produce' question. It involves selecting the most efficient combination of resources and technology (e.g., labor-intensive vs. capital-intensive methods) to produce the chosen goods and services.

Conclusion

Based on the analysis, the choice between producing different types of goods, such as capital goods versus consumer goods, is the decision that reflects the 'what to produce' economic problem. Scarce resources need to be allocated between these categories to meet the society's needs and wants.