Chapter 2- What is a production possibilities frontier? What does it represent?
ID: 1123061 • Letter: C
Question
Chapter 2- What is a production possibilities frontier? What does it represent? In a day I can either teach 4 classes or grade 48 assignments. What is the opportunity cost of each class that I teach, in terms of assignments I could grade in the same time? What is the opportunity cost of each assignment graded in terms of the number of classes I could teach? Why can a production possibility frontier be a curve? What makes it bow outward in the center, rather than being a straight line? If a combination of production is within a production possibilities frontier, what is true about that production combination? Be able to read a PPF graph and say if there is, for example, 4000 of one item being created, how much 4 0Explanation / Answer
A production possibility curve represents all the possible combination of two outputs that can be produced in an economy with the available resources. It assumes that all the resources will be used efficiently. It also shows the units of one input that had to be given up in order to produce an extra unit of the other product.
If in one day either four classes or 48 assignments can be taken up, it means the opportunity cost of 1 class is 12 assignments, i.e., in order to take one extra class 12 assignment grading will have to be given up. Similary for grading one assignment, 1/12 of a class will be given up. It can be calculated by finding out the ratio between maximum level of each output that can be produced.
The limitation of resources in an economy makes the PPF downward sloping because for producing etra unit of one output another has to be sacrificed. The law of increasing opportunity cost bends it outward. It says that if an economy produces only one output then after a point its efficiency decreases and thus the opportunity cost increases. This maked the curve outward sloping.
If a combination is within the PPF curve then it denotes that the resources of the economy are not fully utilised. And more output can be produced by utilising all the outputs.
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