The main reason why a production possibilities frontier woul

The main reason why a production possibilities frontier would have a concave shape is:

because consumers face diminishing marginal returns in consumption.

because of decreasing opportunity costs

because the rate at which one good can be substituted for another is fixed.

because as a country specializes in one product, it must give up more of the other.

2.Which of the following is not possible for two countries who trade computers and automobiles with one another?

One country does not have an absolute advantage in either product but has a comparative advantage in one product

One country has an absolute advantage in one product and a comparative advantage in the other product.

One of the countries has a comparative advantage in the production of both products.

One of the countries has an absolute advantage in the production of both products.

3.

Sweater only

Sweater and skirt

Skirt only

neither good

Solution

1).

A PPF is concave, => the PPF have an increasing “opportunity cost”, => if there are 2 goods “X” and “Y”, as we produce more of “X” good we have to forgo more of “Y” per unit of “X”. So, the correct option is “because as a country specialize in one product, it must give up more of the other, => increasing opportunity cost”, => (4).

2).

Now, if 2 country trades to each other, => one country have a “comparative advantage” in the production of one good and the other country gave the same in the production of other good, but it may happen that a single country have “absolute advantage” in both the good.

=> “one of the countries has a comparative advantage in the production of both goods” is not possible, => (3).

3).

The opportunity cost producing “sweaters” of “Germany” is “12/6 = 2. Similarly, opportunity cost producing “skirts” of “Germany” is “6/12 = ½. Now, opportunity cost producing “sweaters” of “Greece” is “20/4 = 5 and opportunity cost producing “skirts” of “Greece” is “1/5”.

Now, since, \"1/5 < 1/2\" , => “Greece” have “Comparative advantage” in the production of “skirts”, having lower opportunity cost in the production of “Skirts”.

=> (3).