When economists state that the opportunity cost of a product increases as more of it is produced, what do they mean? For instance, what is the opportunity cost? And, where in a PPF diagram does this statement apply and where does it not apply?
What will be an ideal response?
In general, the opportunity cost of increasing the production of one good or service is the forgone production of another good or service. The statement that the opportunity cost of a product increases as more of it is produced applies to production points on the production possibilities frontier. On the production possibilities frontier, resources are fully employed. Hence to increase the production of one good or service, resources must be switched away from the production of another good or service and hence the production of that good or service decreases. And, as more of the first good or service is produced, the opportunity cost of an additional unit becomes larger, so that the opportunity cost increases. However, the assertion that the opportunity cost of a product increases as more of it is produced does not apply to production points within the production possibilities frontier. Production points within the production possibilities frontier are points at which there are resources being used inefficiently. From a production point with inefficiently used resources, to increase the production of a good, some of the resources can be used efficiently and so there is no opportunity cost in terms of forgone other products. Therefore from a point within the production possibilities frontier, the opportunity cost of increasing the production of a good is zero.
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In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will
a. raise the value of the currency b. lower the nominal interest rate c. increase the volume of trading in the foreign exchange market d. lower the trade-weighted exchange rate e. increase consumer inflation.
Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, then
a. both the unemployment rate and labor-force participation rate would be higher. b. the unemployment rate would be higher ,and the labor-force participation rate would be lower. c. the unemployment rate would be lower, and the labor-force participation rate would be higher. d. both the unemployment rate and labor-force participation rate would be lower.