Chapter 3, Problem 2FRQ

To determine

The question requires us to draw the production possibilities curve and label the productive efficient point, the point that is not feasible, and the point that represents unemployment.

Explanation of Solution

The production possibility model with bowed-out and bowed-in downward sloping curve for a firm indicates that the firm is producing the combinations of two goods and such PPC will have different opportunity costs at a different point on the curve, while the PPC with constant opportunity cost will be the straight and downward sloping line.

The following graph represents the straight-line production possibilities curve:

  

In the above graph:

1. If an economy produces at the points on the production possibility curve, the economy represents product efficiency. Point E represents the productive efficient point where economy is producing only shelter.
2. Point U represents the point at which there might be unemployment in the economy because at this point economy is producing less than its efficiency. When an economy is producing less than its potential capacity then its indicating the unemployment in the market.
3. Point I represents the point which is not feasible because economy has less resources to produce at that point.