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Chapter 2: Problem 3

What does increasing marginal opportunity costs mean? What are the implications of this idea for the shape of the production possibilities frontier?

Short Answer

Expert verified
Increasing marginal opportunity costs means that the cost of producing additional units of a certain good increases. This concept shapes the production possibilities frontier (PPF), making it concave or bowed out, demonstrating that more of one good can be produced only by giving up increasingly more of another good.

Step by step solution

01

Understanding Marginal Opportunity Costs

Increasing marginal opportunity costs means that as you continue to increase production of one good, the opportunity cost (i.e., the cost of foregoing the next best alternative) increases. This happens because resources (like labour, capital, etc.) are not perfectly adaptable to the production of all goods.
02

Understanding Production Possibilities Frontier (PPF)

The production possibilities frontier (PPF) is a graph that shows all the different ratios of two goods that can be produced when the resources are used efficiently. On this graph, the good on horizontal axis is typically one that is considered when marginal opportunity costs are in question.
03

Connecting both Concepts

The increasing marginal opportunity costs is reflected in the shape of the PPF. In the beginning, the PPF might be quite steep because the first units of the good on the horizontal axis can be produced with just a small increase in the production of the good on the vertical axis. However, as we move along the PPF, the curve becomes flatter. This is because as more of the good on the horizontal axis is produced, more of the good on the vertical axis needs to be given up. This representation of the PPF illustrates the principle of increasing marginal opportunity costs.

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Most popular questions from this chapter

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