Economics Production Possibility Curve Quiz

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Questions and Answers

What is the significance of increasing opportunity cost in the context of production?

Increasing opportunity cost highlights the law of diminishing returns, indicating that as more of one good is produced, larger amounts of another good must be sacrificed.

How does the shape of the Production Possibility Curve (PPC) reflect decreasing opportunity costs?

In a PPC with decreasing opportunity costs, the slope becomes less steep, indicating that the sacrifice of one good for another decreases as more units are produced.

What relationship exists between the law of variable proportions and PPC?

The law of variable proportions explains how output changes as one input is varied while others are held constant, affecting the slope of the PPC due to changing opportunity costs.

Describe a scenario where the opportunity cost can decrease as production increases.

A scenario occurs when producing additional units of wheat requires increasingly smaller sacrifices of cotton, reflecting higher efficiency at larger scales of wheat production. Signup and view all the answers

Explain the implications of diminishing returns to scale on long-run production.

Diminishing returns to scale imply that, beyond a certain point, increasing all inputs results in less than proportional increases in output, affecting long-run production decisions. Signup and view all the answers

What does a downward sloping shape of the PPC indicate about opportunity costs?

It indicates that opportunity costs are constant. Signup and view all the answers

What happens to the PPC when resources are not fully utilized?

The PPC will be positioned anywhere below the curve. Signup and view all the answers

What is meant by opportunity cost in economic terms?

Opportunity cost refers to the value of the next best alternative foregone. Signup and view all the answers

How does technological improvement affect the PPC?

Technological improvement can push the PPC outward. Signup and view all the answers

In a world of technological advancement, what is a possible impact on opportunity costs?

There could be a prevalence of decreasing opportunity costs in certain cases. Signup and view all the answers

What assumption underlies the construction of the PPC in relation to resource utilization?

It assumes that all resources are fully utilized in production. Signup and view all the answers

What factors can lead to an outward shift of the PPC?

Quantitative and qualitative improvements in factors of production. Signup and view all the answers

What do economists who believe in decreasing opportunity costs suggest about production scenarios?

They suggest that such scenarios may be theoretical or hypothetical. Signup and view all the answers

What are the main characteristics of perfect competition?

The main characteristics of perfect competition include a large number of buyers and sellers, homogenous products, perfect knowledge of the market, free entry and exit, and no single participant can influence the market price. Signup and view all the answers

Explain the concept of equilibrium for a firm in perfect competition.

In perfect competition, a firm's equilibrium occurs where its marginal cost (MC) equals marginal revenue (MR), maximizing profit at this output level. Signup and view all the answers

How is a firm's supply curve derived under perfect competition?

A firm's supply curve under perfect competition is derived from its marginal cost curve above the average variable cost (AVC) curve. Signup and view all the answers

What determines the market supply curve in perfect competition?

The market supply curve in perfect competition is determined by the horizontal summation of all individual firms' supply curves at each price level. Signup and view all the answers

Describe the short-run equilibrium for a firm operating in a perfectly competitive market.

In the short run, a firm's equilibrium occurs where it produces at a level where MR equals MC, allowing for positive, zero, or negative economic profits. Signup and view all the answers

What are the conditions for long-run equilibrium in a perfectly competitive market?

Long-run equilibrium in perfect competition occurs when firms make zero economic profits, with price equaling both marginal cost and minimum average total cost. Signup and view all the answers

Explain the significance of the Long-Run Industry Supply Curve (LRS) in perfect competition.

The Long-Run Industry Supply Curve (LRS) illustrates the relationship between industry price and quantity supplied, assuming that all firms can enter or exit the market. Signup and view all the answers

What does allocative efficiency mean in the context of perfect competition?

Allocative efficiency in perfect competition occurs when resources are distributed in such a way that maximizes total surplus, where price equals marginal cost. Signup and view all the answers

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Flashcards

Perfect Competition

A market structure where many firms sell identical products and have no control over price, leading to free entry and exit.

Equilibrium of the Firm

The point where the firm's marginal cost equals the market price, maximizing its profit.

Firm's Supply Curve

The upward-sloping curve showing the relationship between price and the quantity a firm is willing to supply.

Market Supply Curve

The sum of all individual firm supply curves in a market, showing the total quantity supplied at different prices.