For firms to be producing along the Production Possibilities Curve (meaning they are achieving production efficiency), which of the following must hold? a. inputs are efficiently allocated to the production outputs b. the slopes of the isoquants associated with outputs produced are equal c. the marginal rates of technical substitution of one input for another in the production of outputs are equal d. a and b e. a, b, and c
The correct answer and explanation is:
Correct Answer: e. a, b, and c
To be producing along the Production Possibilities Curve (PPC), a firm or economy must be operating with production efficiency. This means all resources are being used in the best possible way and no additional output of one good can be achieved without decreasing the output of another. Each option in the question represents a necessary condition for achieving production efficiency, so all must be satisfied.
a. Inputs are efficiently allocated to the production outputs: This ensures that no input is being wasted and that every resource is contributing to the maximum possible production. Efficient allocation also means that the economy cannot increase the production of one good without reducing the production of another. If this condition fails, the firm would be operating inside the PPC, not on it.
b. The slopes of the isoquants associated with outputs produced are equal: Isoquants show combinations of inputs that produce a given level of output. The slope of an isoquant is the Marginal Rate of Technical Substitution (MRTS), which shows how one input can be substituted for another while keeping output constant. If the slopes are equal across all outputs, it means resources are being allocated in a way that balances trade-offs between products, a condition needed for efficiency.
c. The marginal rates of technical substitution of one input for another in the production of outputs are equal: This confirms that inputs are being substituted at the most productive rates. Equal MRTS across production processes ensures that firms are using inputs in a way that no input is overused or underused in any output, which supports optimal efficiency.
In conclusion, production along the PPC requires that resources be fully and efficiently utilized. All three conditions—efficient allocation, equal slopes of isoquants, and equal MRTS—must be satisfied for this to occur. Hence, the correct answer is e. a, b, and c.