A production possibilities frontier with increasing opportunity cost is considered:
A. concave and bowed outward.
B. A straight line.
C. horizontal.
D. convex.
The correct answer and explanation is:
The correct answer is A. concave and bowed outward.
Explanation:
A production possibilities frontier (PPF) represents the maximum possible output combinations of two goods or services that an economy can produce, given fixed resources and technology. The shape of the PPF depends on the opportunity cost of producing one good in terms of the other.
When the opportunity cost of producing a good increases as more of it is produced, the PPF will be concave and bowed outward. This is because resources are not perfectly adaptable to the production of both goods. As more of one good is produced, resources that are better suited to producing the other good must be used, causing the opportunity cost to rise.
For example, if a country is producing both cars and computers, the first few cars it produces may come from resources that are easily convertible from computer production. However, as it produces more cars, it must use resources that are less suited to car production and better suited to computer production, leading to an increasing opportunity cost. The PPF bows outward as a result.
This outward curvature is characteristic of increasing opportunity cost, and it implies that as production of one good increases, more and more of the other good must be sacrificed to produce additional units. This is a fundamental assumption in economics, reflecting the reality that resources are not perfectly adaptable to all types of production.
In contrast, if opportunity cost remained constant (as with a straight-line PPF), the PPF would be a straight line, indicating that resources can be easily shifted between the two goods without any increasing sacrifice of one for the other. Therefore, the correct shape for a PPF with increasing opportunity cost is concave and bowed outward.