Question

I. Multiple Choice: Choose the alternative that best completes the statement or answers the question. 1. Production possibilities frontiers are typically concave (bowed out) from the origin because of the law of supply b. a. there is usually a one-for-one trade-off in resources used in production economies of scale enable firms to reduce the average costs of production as output rises d. c. the opportunity cost of a good rises as the quantity of the good produced increases e. resources are often left idle in the firm 2. If the economy is producing a combination of goods inside its production possibilities frontier, then a. workers are on vacation b. a significant number of workers have little education some resources are being wasted technology must improve before output can increase the opportunity cost of producing more output is greater than the value of the additional output that could be produced c. d. e. 3. When there is an improvement in technology, holding all else constant, a. the production possibilities frontier will shift inward b. society faces larger opportunity costs from shifting productive resources from one use to another c. d. goods and services will increase in price the economy must have some idle resources e. the production possibilities frontier will shift outward Figure 2-4 4. Which production possibilities frontier(s) in Figure 2-4 depict(s) a situation in which all resources are perfect substitutes in production? a. both C and E b. both D and E d. D

Answer 1

Since the production possibility can be defined as a line which is summation of different combinations of two different goods which can be produced with the available resources by using it efficiently. If the technology improves or resources increase, then the PPF shifts outwards.

Since all the points on the PPF, shows the efficient utilization of the resources and all the allocations on the PPF are best.

1.

The PPF is concave from origin because the opportunity cost a good rises as the quantity of the good produced increases. This is because when more unit of good is produced, then this is possible only when loss of good 2 is greater than increase in the unit of good 1.

Hence opportunity cost increases.

Hence option d is the correct answer.

2.

If any economy currently producing a combination of goods inside the PPF, then it means there is under-utilization of the resources.

Since under-utilization of the resources also means that some resources are being wasted.

Hence option c is the correct answer.

3.

Since with the improvement in the technology, while holding all else constant, leads to production of both goods and Hence PPF shifts outward.

Hence option e is the correct answer.

4.

When resources are perfect substitute, the opportunity cost of the production will be constant. Hence in this case the PPF will be downward sloping straight line.

Hence diagram D represent the correct PPF.

Hence option d is the correct answer.