Answer to Question #277496 in Macroeconomics for argho

Question

Give two examples of important trade-offs that you face in your life.

a. Draw a production possibilities frontier to illustrate your each trade-off

situation. What do you suppose determines the shape and position of the

frontier?

b. Using the concept of opportunity costs, explain whether you had a bowed-out

shape PPF or straight line PPF?

Answer 1

In economics, a trade-off is defined as an "opportunity cost." For example, you might take a day off work to go to a concert, gaining the opportunity of seeing your favorite band, while losing a day's wages as the cost for that opportunity. Or you choose between buying food and clothes.

a. The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology.

The shape of the PPF depends on whether there are increasing, decreasing, or constant costs.

b. The possible bowed out shape of the PPC for such goods as food and clothes indicates that there are increasing opportunity costs of production.