Management Notes

Reference Notes for Management

If a country has a linear (downward sloping) production possibilities frontier, then production is said to be subject to:

If a country has a linear (downward sloping) production possibilities frontier, then production is said to be subject to:

 Options:

a. constant opportunity costs.
b. decreasing opportunity costs.
c. first increasing and then decreasing opportunity costs.
d. increasing opportunity costs.

The Correct Answer Is:

a. constant opportunity costs.

The correct answer is (a) constant opportunity costs. Let’s delve into why this is the case and why the other options are not correct.

When we talk about a production possibilities frontier (PPF), we are essentially discussing the various combinations of two goods or services that an economy can produce, given its finite resources and technology.

The PPF typically shows the trade-off between producing one good and another. In the context of a linear, downward-sloping PPF, it implies that the economy faces constant opportunity costs. Let’s break down each option and explain why the others are not correct:

a. Constant Opportunity Costs:

A linear, downward-sloping PPF represents a situation where the opportunity cost of producing one good instead of another remains constant as you move along the curve.

In other words, the resources used to produce one good can be easily and equally reallocated to produce the other good without any increase in cost. This is the essence of constant opportunity costs.

Imagine an economy that produces only two goods: apples and oranges. If the PPF is linear, it means that the resources used to produce apples can be switched to producing oranges, and vice versa, without any increase in cost. This implies that the opportunity cost of producing apples instead of oranges (or vice versa) is constant.

Why the other options are not correct?

b. Decreasing Opportunity Costs:

In an economy with a decreasing opportunity cost, the PPF would be concave (curving outward). This would imply that as you move along the PPF from left to right, the opportunity cost of producing one good decreases. This is not consistent with a linear PPF.

Option (b), which suggests decreasing opportunity costs, would imply a concave PPF, curving outward. This would indicate that as the economy produces more of one good and less of another, the opportunity cost of producing that good decreases.

However, in a linear PPF scenario, the opportunity cost remains constant, meaning that reallocating resources from one good to another doesn’t result in a change in the relative costs.

c. First Increasing and Then Decreasing Opportunity Costs:

This option suggests a convex (curving inward) PPF, indicating that the opportunity cost initially increases and then decreases as you move along the curve. Again, this is not consistent with a linear PPF where the opportunity cost remains constant.

Option (c) proposes a PPF with first increasing and then decreasing opportunity costs, implying a convex curve. This would suggest that initially, as more of one good is produced and less of another, the opportunity cost increases, but then it starts to decrease.

Again, this contradicts the characteristics of a linear PPF, where the opportunity cost is consistent throughout the production possibilities curve.

d. Increasing Opportunity Costs:

In an economy with an increasing opportunity cost, the PPF would be concave (curving inward). Indicating that as you produce more of one good and less of another, the opportunity cost of producing that good increases. This is not the case in a linear, downward-sloping PPF where opportunity costs are constant.

Lastly, option (d) suggests increasing opportunity costs, which would be represented by a concave PPF, curving inward. This would mean that as the economy produces more of one good and less of another, the opportunity cost of producing that good increases.

However, in the case of a linear PPF, the opportunity cost remains constant, so this option does not align with the given scenario.

In summary, a linear, downward-sloping PPF represents a situation of constant opportunity costs, where resources can be reallocated between the production of two goods without any change in the relative costs.

The other options (b, c, and d) describe situations where opportunity costs are not constant and involve different shapes of the PPF, which do not match the characteristics of a linear PPF. Therefore, the correct answer is indeed (a) constant opportunity costs. 

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