Assume there are only two goods produced in the economy (having fixed amount of resources and technology), Good A and Good B. The quantities of Good A and Good B which can be produced using given resources are plotted on a graph with good A on x-axis and Good B on y-axis. Different combinations of A and B when plotted and joined gave a downward sloping concave curve. One point, Point F lies above the curve. Point E lies below the curve.
Why is the obtained curve concave to origin?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: Increasing marginal rate of transformation
The obtained curve is a Production Possibility Curve (PPC), which represents different combinations of Good A and Good B that can be produced using the available resources and technology.
- The PPC is concave to the origin because resources are not equally efficient in producing both goods.
- As more of Good A is produced, increasing amounts of Good B must be sacrificed due to the law of increasing opportunity cost.
- This results in an increasing marginal rate of transformation (MRT), which means that more units of Good B must be given up to produce each additional unit of Good A.