Question

Why is the PPF bowed outwards (instead of linear)? a) … because there is an increasing marginal opportunity cost of producing both goods b) … because there is a decreasing marginal opportunity cost of producing both goods c) … because consumers prefer consumer goods to capital goods d) …because demand for capital goods is higher than demand for consumer goods

Answer 1

Because there is increasing marginal opportunity cost of producing both goods

Production possiblilty curve is a curve showing different combination of two goods say Good X and Good Y which can be produced with the available resources. Marginal opportunity cost is the cost of one more unit of output when resources are shifted from production of Good X to Good Y.

Production possibility curve is bowed outward because to produce each additional unit of Good X, more and more units of Good Y will have to be sacrificed than before. Marginal opportunity cost of producing every additional unit of Good X tends to increase in terms of the loss of production of Good Y. In other words, shifting of resources from one use to other will obey the law of increasing marginal opportunity cost. Therefore production possibility curve is bowed outward because as more and more resources are shifted from Good X to Good Y, marginal opportunity cost tends to rise.