If an economy is operating at a point inside its production possibilities curve, then:
there is underutilization of resources.
there is overutilization of resources.
the opportunity cost of resources is zero.
the opportunity cost of resources is negative.
The correct answer and explanation is:
The correct answer is: there is underutilization of resources.
When an economy operates inside its production possibilities curve (PPC), it indicates that the economy is not using its resources efficiently. The production possibilities curve shows the maximum output combinations of two goods or services that an economy can produce, given the available resources and technology. A point inside the curve represents a situation where the economy could be producing more of one or both goods, but it is not doing so. This implies that resources are not being fully or efficiently utilized.
Underutilization of resources typically results from factors such as unemployment, inefficient allocation of labor, or idle capital. For example, if there is high unemployment or underemployment in an economy, it would be operating inside the PPC because the labor force is not being fully employed. Similarly, if there is underinvestment or misallocation of capital, the economy would not be using its productive capacity to its fullest potential.
At any point inside the PPC, the opportunity cost is not zero, because producing more of one good requires shifting resources away from the other good. Opportunity cost represents the value of the next best alternative foregone, so there is still a cost associated with reallocation, even though the economy is not operating at its maximum potential.
Overutilization of resources would push the economy beyond the PPC, which is not feasible without increasing resources or improving technology. Negative opportunity cost is not a typical situation in economics; opportunity cost is usually positive or zero, depending on the scenario.
In summary, when an economy operates inside the PPC, it indicates that there is underutilization of resources, and there is potential for increased production without sacrificing the production of other goods.
