In class we built a Production Possibility Frontier (PPF) where each sector exhi

Question

In class we built a Production Possibility Frontier (PPF) where each sector exhibits constant

returns to scale technology and where sectors use dierent capital-labor ratio. Suppose now

that both sectors exhibit increasing returns to scale.

(i) Provide a denition.

(ii) Build the production possibility frontier for a two sector economy by using the same

technique as in class (i.e. with the use of an Edgeworth box) and by assuming that

the two sectors use the same technology. Explain your answer.

(iii) Do the same as in (ii) when the two sectors use dierent technologies. Explain your

answer.

Explanation / Answer

i) PPF is a graph representing production tradeoffs of an economy given fixed resources.

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