Discuss the following indicators of the production-possibility curve. Include diagrams. 1) Efficiency 2) Opportunity Costs 3)...

Discuss the following indicators of the production-possibility curve. Include diagrams.

1) Efficiency

2) Opportunity Costs

3) Marginal Rate of Transformation

4)Shape

5)Position

Solutions

Expert Solution

1) efficiency implies that resources are fully utilised, which is achieved when combination of two goods, x and y is produced which is in the production possibility curve. This is so because combination of output is produced which is below the curve resources are not fully utilised. Outside the curve resources are not enough to produce.

2) . Opportunity cost at point A is high because already less of x is produced, and producers are not willing to give up more x. Opportunity cost at point B is low because high level of x is produced.

3) marginal rate of transformation is the rate at which units of one good has to be sacrificed to produce one more unit of another good. Slope of production possibility curve gives marginal rate of transformation, AA gives MRTS.

4) Shape of production possibility curve is bowed out or concave because of increasing opportunity cost. MRTS increases as we move from top left to bottom right.

5) position of the curve is determined by technology level. Increase in technology shifts the position of the curve to the right as shown in first diagram.

Rahul Sunny answered 1 year ago

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