Which statement best describes the difference between fixed capacity and operating capacity in the context of the Production Possibilities Frontier (PPF)?

• A. Fixed capacity is the output level when all resources are fully utilized, whereas operating capacity is always less than fixed capacity due to inefficiency.
• B. Fixed capacity refers to the maximum potential output given available resources, while operating capacity is the actual output achieved at a given time.
• C. Fixed capacity changes frequently in the short run, while operating capacity remains constant.
• D. Operating capacity determines the shape of the PPF, while fixed capacity determines the opportunity cost.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of Fixed Capacity in the context of the Production Possibilities Frontier (PPF). Fixed capacity refers to the maximum potential output that an economy can produce given its available resources and technology. It represents the outer boundary or limit of production possibilities.
2. Step 2: Understand the concept of Operating Capacity. Operating capacity is the actual level of output that an economy achieves at a given time, which may be less than the fixed capacity due to factors such as inefficiencies, underutilization of resources, or temporary constraints.
3. Step 3: Compare Fixed Capacity and Operating Capacity. Fixed capacity is a theoretical maximum output assuming full and efficient use of resources, while operating capacity reflects real-world conditions where resources may not be fully or efficiently used.
4. Step 4: Relate these concepts to the PPF. The PPF illustrates the maximum possible output combinations (fixed capacity), while actual production points inside the PPF represent operating capacity, showing less than full utilization.
5. Step 5: Evaluate the given statements based on these definitions. The correct statement should highlight that fixed capacity is the maximum potential output given resources, and operating capacity is the actual output achieved at a given time.