Refer to the diagram. If actual production and consumption occur at point q1, which of the following statements is correct?

• A. All resources are fully employed and there is no opportunity cost.
• B. Resources are being used efficiently, and the economy is operating on the PPF.
• C. The economy is experiencing productive inefficiency, as it is operating inside the PPF.
• D. The economy is producing at a point that is unattainable with current resources and technology.

Answer: (C)

Verified step by step guidance

1. Understand the concept of the Production Possibility Frontier (PPF): The PPF represents the maximum possible output combinations of two goods that an economy can produce using all available resources efficiently.
2. Identify the location of point q1 relative to the PPF on the diagram: If q1 lies inside the PPF curve, it means the economy is not using all resources efficiently; if it lies on the curve, resources are fully employed; if outside, the point is unattainable with current resources.
3. Recall that points inside the PPF indicate productive inefficiency because some resources are underutilized or misallocated, leading to less output than possible.
4. Recognize that points on the PPF represent productive efficiency, where the economy is maximizing output given its resources and technology, and there is an opportunity cost when moving along the curve.
5. Conclude that if q1 is inside the PPF, the correct statement is that the economy is experiencing productive inefficiency, as it is operating inside the PPF.