Consider an economy with fixed amount of resources and given technological state. It produces only 2 goods – Good A and Good B. Different combinations showing maximum outputs of two goods which can be produced (when given resources and technology are used fully) are plotted on a graph. When all the plotted points are joined, following graph was obtained.
Based on the above graph, answer the following questions.
Which point on the graph shows underutilization of resources?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: Point E
Any point on the Production Possibility Frontier indicates optimum utilization of resources whereas any point below it represents underutilization.
On a Production Possibility Curve (PPC) graph, a point inside the curve indicates underutilization of resources. This is because the PPC represents the maximum possible combinations of two goods that an economy can produce with its given resources and technology. When a point lies inside the curve, it means that the economy is not using all of its available resources efficiently to produce goods. Instead, there is idle or unused capacity in the economy, indicating that resources are being underutilized.
Therefore, any point on the PPC graph that lies below the curve represents underutilization of resources.