Suppose that, in the context of the Edgeworth box diagram in production, there are Constant returns to scale in each of the two industries and that one good is relatively Labor-intensive in its production process and the other good is relatively capital-intensive In its production process. In considering this Edgeworth box diagram and the PPF that Can be derived from it,
A) all points on the "diagonal" of the Edgeworth box diagram will have corresponding Points on the PPF.
B) no point on the "diagonal" of the Edgeworth box diagram will correspond to a point On the PPF.
C) the PPF will show increasing opportunity costs.
D) the PPF will show constant opportunity costs.

Question

Quizplus · Accepted Answer

Since one good is relatively more labor-intensive and the other is relatively more capital-intensive, as we produce more of one good and less of the other, the opportunity cost of producing each additional unit of the good that we produce less of will increase. This leads to the PPF showing increasing opportunity costs. Option A is incorrect because not all points on the diagonal of the Edgeworth Box correspond to points on the PPF. Option B is incorrect because there are points on the PPF that correspond to points on the diagonal of the Edgeworth box, such as the point where the two countries produce only the labor-intensive good or only the capital-intensive good. Option D is incorrect because the constant returns to scale assumption implies that the opportunity cost of producing one good in terms of the other remains constant along the PPF.

Suppose That, in the Context of the Edgeworth Box Diagram