Why is a production possibilities frontier bowed out (concave)?
A) The bowed shape reflects constant opportunity cost.
B) The bowed shape reflects decreasing opportunity cost.
C) The bowed shape indicates that opportunity cost at first decreases at a decreasing rate, and then begins to decrease at an increasing rate.
D) The bowed shape indicates that opportunity cost at first increases at a decreasing rate, and then begins to increase at an increasing rate.
E) The bowed shape reflects increasing opportunity cost.
The correct answer and explanation is :
The correct answer is:
E) The bowed shape reflects increasing opportunity cost.
Explanation:
The Production Possibilities Frontier (PPF) is a graphical representation of the maximum possible combinations of two goods or services that an economy can produce given its available resources and technology. The PPF is typically bowed outward (concave to the origin) because of increasing opportunity cost.
Why is opportunity cost increasing?
Resources are not equally suited to the production of all goods. Some resources are more efficient at producing one good compared to another. As an economy shifts resources from producing one good to another, it must reallocate less efficient resources, leading to a higher opportunity cost.
For example, consider an economy producing both consumer goods and capital goods. Initially, when shifting resources from capital goods to consumer goods, resources best suited for consumer goods are used first, leading to a low opportunity cost. However, as more resources are transferred, less specialized resources must be used, which are not as efficient in producing consumer goods. This results in a higher opportunity cost, making the PPF bowed outward.
Key Reasons for a Bowed-Out PPF:
- Resource Specialization: Some resources are better suited for one type of production than another.
- Diminishing Returns: As production shifts, less suitable resources are used, increasing opportunity cost.
- Law of Increasing Opportunity Cost: The more an economy produces one good, the greater the opportunity cost of producing additional units of that good.
Thus, the PPF is concave because opportunity cost increases as production shifts, making option E the correct answer.