📚 Learning Guide
Production Possibilities and Price Effects
hard

In the context of production possibilities, how does the concept of diminishing returns affect opportunity cost and marginal cost when increasing production of one good over another?

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Learning Path
Learning Path

Question & Answer
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Choose the Best Answer

A

Opportunity cost decreases while marginal cost increases

B

Both opportunity cost and marginal cost remain constant

C

Opportunity cost increases while marginal cost decreases

D

Both opportunity cost and marginal cost increase

Understanding the Answer

Let's break down why this is correct

Answer

Diminishing returns happen when we increase the production of one good while keeping resources for other goods the same. As we produce more of one good, like cars, it becomes harder and more expensive to make each additional car because we have to take resources away from making other goods, like bicycles. This means that the opportunity cost, which is what we give up to make more of the first good, increases. For example, if we shift resources to produce more cars, we might have to give up making more bicycles, and the amount of bicycles we lose for each extra car we produce will grow larger. Therefore, as we focus more on one product, both the opportunity cost and marginal cost of production rise due to the limited resources available.

Detailed Explanation

When you make more of one good, you give up more of another good. Other options are incorrect because Some might think that as you produce more, you save on costs; It's a common mistake to think costs stay the same.

Key Concepts

Opportunity cost
Marginal cost
Diminishing returns
Topic

Production Possibilities and Price Effects

Difficulty

hard level question

Cognitive Level

understand

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