Question

Use the graphs to answer the question below.

The shape of a PPC illustrates the type of opportunity costs involved in production. What type of costs do PPC1 and PPC2 illustrate?

(A) PPC1 illustrates constant opportunity costs and PPC2 illustrates increasing opportunity costs.

(B) PPC1 illustrates constant opportunity costs and PPC2 illustrates decreasing opportunity costs.

(C) PPC1 illustrates increasing opportunity costs and PPC2 illustrates decreasing opportunity costs.

(D) PPC1 illustrates increasing opportunity costs and PPC2 illustrates constant opportunity costs.

(E) PPC1 illustrates decreasing opportunity costs and PPC2 illustrates constant opportunity costs.

Answer 1

PPC 1 illustrates increasing opportunity cost whereas PPC 2 illustrates constant opportunity cost.

Production possibility curve (PPC) refers to graphical representation of possible combination of two goods that can be produced with given resources and technology.

PPC is based on the assumption that when resources are transferred from production of one good to another, the productivity decreases. The opportunity cost of a product is the alternative that must be given up to produce another product. PPF illustrates the concept of opportunity cost.

PPC 1 is concave shaped when we assume that opportunity cost is increasing which shows more and more units are sacrificed to gain an additional unit of another commodity.

PPC 2 is straight line when we assume that opportunity cost is constant that shows that same amount of commodity is sacrificed to gain an additional unit of another commodity.