In: Economics
As we move to the right on a bowed outward production possibilities frontier, we see:
a) increasing labor productivity |
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b) decreasing labor productivity |
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c) increasing opportunity cost |
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d) decreasing opportunity cost |
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! :)