An economy uses only labor as input to produce two goods, A and B. If its...

An economy uses only labor as input to produce two goods, A and B. If its production possibilities frontier (PPF) of two goods is a negative-sloped straight line, what is the implication in opportunity costs? Will the law of increasing costs still hold? Please state briefly.

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Expert Solution

Okay, Let me explain this clearly.

Production Possibility Frontier or PPF shows various alternative combinations of two goods that an economy can produce when the resources are fully and efficiently employed. Generally, the shape of PPF is a downward sloping curve, concave to the origin due to Increasing Marginal Rate of Transformation (MRT) and Increasing Marginal Opportunity Cost (MOC). However this is not the only situation. The PPF can be convex to the origin or it can a negatively sloped straight line. PPF is convex to origin due to Decreasing Marginal Opportunity Cost and PPF is a straight line due to Constant Marginal Opportunity Cost.

For the given question, let me give you an example.

An economy uses only labour as input to produce two goods, A and B, following are the details.

GOOD A	GOOD B
0	50
1	45
2	40
3	35
4	30

In order to determine the shape of PPF, we need to calculate Marginal Opportunity Cost which is,

MOC = Amount of good B given up / Amount of good A gained

GOOD A	GOOD B	MARGINAL OPPORTUNITY COST
0	50	___
1	45	5B:1A
2	40	5B:1A
3	35	5B:1A
4	30	5B:1A

Since MOC is constant throughout, PPF will be a be a negatively sloped straight line.

Rahul Sunny answered 8 months ago

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