Production Possibility Frontier
Question 2
Show the PPF curve under decreasing and increasing returns to labour.
The Production possibility frontier analyses the most efficient use of company resources to achieve different levels of production of output. Labour is one of the variables factors of production. One unique feature of the PPF is that one alternative is usually foregone in order to maximize the production of another product, for example, in a refinery a manager may decide to deploy more human resources to produce more lubricant products than insecticides based on maybe the forces of demand and supply. A constant return to labour (CRL) occurs when the opportunity cost of the production of lubricants is constant. This is not always the case. Return to labour can decrease or increase. Decrease in return to labour may be as a result of equipment downtime as a result of overuse. Increase in return to labour may also occur and could be due to increased capability (training) or technology.
Output (Lubes)
500
400
300
200
100
Labour input 100 200 300
Figure 1. PPF under IRL and DRL
Figure 1 shows production function under increasing and decreasing return on labour. In IRL, each addition of labour input sees an increase in output whereas in DRL, the average output decreases with the extra unit of input; in other words, the labour input is not productive.
Your explanation discusses the concepts of increasing and decreasing returns to labour and the relationship with opportunity cost but your answer could have been enhanced by making use of a production possibilities frontier diagram as illustrated in the specimen answer.
Question 3
Many firms experience IRL at low levels of output and DRL when output increases. Draw the production function for a business where IRL prevails when Q < Qc and DRL when Q > Qc.
Show the PPF curve under decreasing and increasing returns to labour.
The Production possibility frontier analyses the most efficient use of company resources to achieve different levels of production of output. Labour is one of the variables factors of production. One unique feature of the PPF is that one alternative is usually foregone in order to maximize the production of another product, for example, in a refinery a manager may decide to deploy more human resources to produce more lubricant products than insecticides based on maybe the forces of demand and supply. A constant return to labour (CRL) occurs when the opportunity cost of the production of lubricants is constant. This is not always the case. Return to labour can decrease or increase. Decrease in return to labour may be as a result of equipment downtime as a result of overuse. Increase in return to labour may also occur and could be due to increased capability (training) or technology.
Output (Lubes)
500
400
300
200
100
Labour input 100 200 300
Figure 1. PPF under IRL and DRL
Figure 1 shows production function under increasing and decreasing return on labour. In IRL, each addition of labour input sees an increase in output whereas in DRL, the average output decreases with the extra unit of input; in other words, the labour input is not productive.
Your explanation discusses the concepts of increasing and decreasing returns to labour and the relationship with opportunity cost but your answer could have been enhanced by making use of a production possibilities frontier diagram as illustrated in the specimen answer.
Question 3
Many firms experience IRL at low levels of output and DRL when output increases. Draw the production function for a business where IRL prevails when Q < Qc and DRL when Q > Qc.