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CA Foundation · Business Economics · Nature and Scope of Business Economics

An economy is operating at a point strictly inside its production possibility curve (PPC). Which of the following statements is correct?

At a point inside the PPC, resources are unemployed or inefficiently used, so output of one good can rise without reducing the other. Full and efficient use occurs only on the curve. No shift of the PPC is needed to gain this extra output.

  1. AResources are fully and efficiently employed, so output cannot rise
  2. BOutput of one good can be increased without reducing the other, because resources are underutilised or misallocatedCorrect
  3. CThe PPC itself must shift inward to restore efficiency
  4. DThe economy has no opportunity cost at that point

Explanation

A point inside the PPC indicates unemployment or inefficient use of resources, so both goods, or one without sacrificing the other, can be increased by moving toward the curve. Full employment is shown only on the curve. The PPC need not shift, and opportunity cost still exists once the economy reaches the curve.

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