In the two-sector specific-factors model, diminishing returns to labor implies:
A) that the country's production possibilities frontier is linear (a straight line).
B) that the country's production possibilities frontier is concave to the origin (bowed out from the origin).
C) that the country's production possibilities frontier is convex from the origin (bowed in toward the origin).
D) that the country's production possibilities frontier may be either concave to or convex from the origin.

Question

Quizplus · Accepted Answer

Diminishing returns to labor in the two-sector specific-factors model means that as more labor is added to one sector, the marginal product of labor in that sector decreases, while the other sector remains unchanged. This implies that the production possibilities frontier is bowed out from the origin, meaning that as the country produces more of one good, it must give up increasing amounts of the other good. This is because resources are not perfectly transferable between sectors, and as more labor is allocated to one sector, the other sector experiences diminishing returns to capital, which reduces its output.

In the Two-Sector Specific-Factors Model, Diminishing Returns to Labor Implies