Exam 6: Optimal Output Selection

Correct Answer:

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A. Increasing returns:

Graph: In a PPF with increasing returns, the curve will be concave to the origin, meaning that as more resources are allocated to the production of a good, the opportunity cost of producing that good decreases.

Explanation: A real-world example of a PPF with increasing returns can be seen in the production of smartphones. As technology and production processes improve, the resources required to produce each additional smartphone decrease. This means that the opportunity cost of producing smartphones decreases, allowing for more smartphones to be produced without sacrificing the production of other goods.

B. Constant returns:

Graph: In a PPF with constant returns, the curve will be a straight line, indicating that the opportunity cost of producing one good remains constant regardless of the quantity produced.

Explanation: A real-world example of a PPF with constant returns can be seen in the production of agricultural goods. For example, if a farmer has a fixed amount of land and labor, the opportunity cost of producing one additional unit of a crop remains constant, regardless of the quantity already produced.

C. Decreasing returns:

Graph: In a PPF with decreasing returns, the curve will be convex to the origin, indicating that as more resources are allocated to the production of a good, the opportunity cost of producing that good increases.

Explanation: A real-world example of a PPF with decreasing returns can be seen in the production of oil. As more oil is extracted from a particular oil field, the cost and effort required to extract additional barrels of oil increases, leading to a higher opportunity cost of producing oil. This can result in a decrease in the production of other goods as resources are diverted to the increasingly costly production of oil.