Problem 3 What condition must hold for the... [FREE SOLUTION]

Chapter 2: Problem 3

What condition must hold for the PPF to be bowed outward (concave downward)? To be a straight line?

Short Answer

Expert verified

The PPF is bowed outward (concave downward) when the opportunity costs of producing goods increase. That is, the more of one good produced, the greater the opportunity cost in terms of the other good. Conversely, for the PPF to be a straight line, the opportunity cost should stay constant irrespective of production level changes, meaning that the rate of trade-off between the two goods is constant.

Step by step solution

Understanding the PPF

A PPF shows all possible combinations of two goods that a country can produce, given its resources and technology. The shape of the PPF depends on whether the opportunity costs are constant or increasing.

Recognizing the condition for the PPF to be bowed outward (concave downwards)

The PPF is bowed outward when the opportunity cost of one good in terms of the other is increasing. In other words, the more of one good we produce, the greater the amount of the other good we would need to give up. Suppose we refer to the two goods as A & B. If the opportunity cost of good A in terms of good B increases as more of good A is produced, then the PPF is bowed outward. This is typically the case due to most resources not being equally suitable for producing all goods.

Identifying the condition for the PPF to be a straight line

If the PPF is a straight line, then the opportunity cost of one good in terms of the other good is constant, which means the rate at which one good can be traded for the other - the trade-off between the two - does not change as more of one good is produced. Therefore, for a PPF to be a straight line, the opportunity cost in terms of one good must remain constant as more of the other good is produced.