Which statement is supported by the material?

• A. An economy inside the PPC is efficient, and wages rise with any labor demand increase
• B. An economy inside the PPC is inefficient, and wages rise when the demand for workers increases
• C. An economy inside the PPC is efficient, and wages rise when labor demand increases
• D. An economy inside the PPC is inefficient, and wages fall when the demand for workers increases

Answer: (B)

When an economy is inside the production possibilities frontier, not all resources are being used, so production isn’t at its maximum—this is inefficiency. In the labor market, if the demand for workers rises, employers compete for a scarcer resource, which pushes wages up. So the combination of being inside the frontier (inefficient use of resources) and wages rising when labor demand increases fits the statement best. The other ideas clash with what being inside the frontier means (that it’s not efficient) or with how wages typically respond to higher labor demand (they tend to rise, not fall).