Question

In: Economics

As we move to the right on a bowed outward production possibilities frontier, we see: a)...

As we move to the right on a bowed outward production possibilities frontier, we see:

a) increasing labor productivity

b) decreasing labor productivity

c) increasing opportunity cost

d) decreasing opportunity cost

Solutions

Expert Solution

Hello!

The answer to this question is (C) increasing opportunity cost.

The production possibility frontier is a graph showing all the production possilities or production combinations of two goods (assumption) that can be carried out from optimal usage of current resources at a given level of technology. This frontier is bowed outwards because of the law of increasing opportunity cost. A PPF is bow shaped when it is assumed that the workers have different opportunity cost of producing one good in terms of other due to difference in skills and productivity related to different goods. This means that while a worker might produce cheese efficiently in an economy but is inefficient in producing guns due to the lack of particular skill set. Therefore, as we move to the right of a outward bowed PPF, we see that the oppotunity cost of producing one more unit of good X (on x-axis) in terms of good Y (on y-axis) increases as more and more units of good Y have to be forgone to produce one more unit of good X. Each extra production of good X is taking place when more and more workers are shifted from good Y to good X. This increases inefficieny and hence increased opportunity cost.

I hope you understood! :)


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