A movement from a point inside the production possibilities frontier to a point on the production possibilities frontier represents Select one: A. unemployment of labour but not capital. B. an infinite opportunity cost. C. full employment of labour but not capital. D. a tradeoff. E. a free lunch.
The Correct Answer and Explanation is:
The correct answer is D. a tradeoff.
Explanation:
The production possibilities frontier (PPF) illustrates the maximum combinations of two goods or services that an economy can produce, given its resources and technology. Points inside the PPF represent inefficient production, meaning that the economy is not utilizing its resources fully or efficiently. Points on the PPF represent efficient production, where all resources are being used to their maximum potential.
When an economy moves from a point inside the PPF to a point on the PPF, it implies that resources are being better utilized, but this shift involves a tradeoff. Here’s why:
- Tradeoff: Moving to a point on the PPF often involves increasing the production of one good, which means sacrificing some production of the other good. This is the essence of opportunity cost—the cost of forgoing the next best alternative when making a decision.
- At points inside the PPF, there is underutilization of resources (e.g., unemployment of labor or capital). Moving to the PPF means fully utilizing available resources, but in doing so, the economy must make choices about how to allocate these resources between the two goods.
Other options:
- A. Unemployment of labor but not capital: This is not correct because moving to the PPF could involve the underutilization of both labor and capital.
- B. An infinite opportunity cost: The opportunity cost is generally finite. The PPF shows increasing opportunity costs, but not necessarily infinite.
- C. Full employment of labor but not capital: This is incorrect because moving to a point on the PPF implies full employment of all resources, not just labor.
- E. A free lunch: There’s no such thing as a “free lunch” in economics. Every choice involves tradeoffs, meaning no point on the PPF comes without opportunity cost.
Thus, the shift to a point on the PPF represents a tradeoff, as the economy is making decisions about how to allocate scarce resources to maximize production.
