Question

Consider the following production possibilities frontier model for an economy that produces only two goods: alfalfa and smartphones.

020406080100100806040200SMARTPHONES (Millions)ALFALFA (Millions of bushels)PPF

Which of the following is true regarding this economic model?

In order to construct such a model, an economist would need real life data regarding countries that only produce two goods.

The fact that there are only two goods produced in this theoretical economy, when, in reality, economies produce many more types of goods, means this model is generally useless.

The fact that there are only two goods produced in this theoretical economy is a simplifying assumption that still allows economists to demonstrate key economic concepts.

This PPF is not an economic model.

Answer 1

Production possibilities frontier model is a simplified model that depicts the concept of efficient utilization of resources, opportunity cost of production etc.

This model uses two-goods approach in order to demonstrate the key economic principles in simple manner so that complexity can be avoided and economic matter can be grapsed in effective manner.

Thus, it can be stated that with respect to PPF, the fact is that there are only two goods produced in this theoritical economy is a simplifying assumptionthat still allows economists to demonstrate key economic aspects.

Hence, the correct answer is the option (3).