As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?
A) It remains constant.
B) It decreases.
C) It increases.
D) It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
E) None of these depicts what happens to opportunity cost.
The correct answer and explanation is :
The correct answer is C) It increases.
Explanation:
The production possibilities frontier (PPF) is a graphical representation of the maximum combination of two goods that an economy can produce, given its available resources and technology. The PPF is typically bowed outwards (concave to the origin), reflecting the principle of increasing opportunity costs.
Opportunity cost refers to the value of the next best alternative foregone when a choice is made. When an economy allocates more resources to the production of one good, it must divert resources away from producing the other good. As more and more of one good is produced, the economy faces higher opportunity costs.
This happens because the resources in an economy are not perfectly adaptable to the production of both goods. Some resources are better suited to producing one good than the other. For example, imagine an economy producing both agricultural goods and technology. The labor and capital needed to produce agricultural goods may not be as effective when used in technology production, and vice versa. When the economy shifts more resources towards one good, it has to use less efficient resources for the other good, thus increasing the opportunity cost.
In the context of a bowed-out PPF, the increasing opportunity cost is due to the law of diminishing returns. As more resources are devoted to producing one good, the resources that are already specialized in the production of the other good are less efficient at switching roles. This leads to a steeper slope of the PPF as more of one good is produced, indicating a higher opportunity cost for each additional unit produced.
For example, if an economy is heavily producing food and then starts producing more technology, it will face increasing opportunity costs because the resources shifted to technology production may not be as efficient, causing a larger sacrifice in the amount of food that can be produced.
Thus, the correct answer is C) It increases because the opportunity cost of producing more of one good grows as more resources are shifted towards it.