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CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

Which of the following is the best example of a situation in which an economy is operating inside its production possibility frontier?

An economy operates inside its production possibility frontier when resources are underused, for example through large-scale unemployment and idle factories. Output is then lower than the maximum attainable, whereas full and efficient use of resources would place the economy on the frontier.

  1. AResources are fully and efficiently employed in producing the best combination of goods
  2. BLarge unemployment of labour exists and factories remain idleCorrect
  3. CThe economy shifts from one point on the frontier to another
  4. DTechnology improves and the frontier shifts outward

Explanation

A point inside the production possibility frontier indicates underutilisation or inefficient use of resources, such as unemployment and idle capacity. Full employment places the economy on the frontier, moving along it shows a trade-off, and technological progress shifts the frontier itself.

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