Input-Output Production Structure and Non-Linear Production Possibility Frontier

Abstract

Input-output (Leontief) production function is widely used in economic analysis. And diminishing marginal rate of return is a very well accepted economic fact. Leontief production function normally results in a linear production possibility frontier (PPF) due to its linear feature, whereas diminishing marginal rate of return implies a non-linear PPF. In this paper, the authors aim to fix this problem by considering multiple primary inputs in a simplified two-sector economy. The authors find that it is possible to curve a non-linear PPF by using Leontief production function when the authors add heterogeneous primary inputs. The authors also discuss the PPF using non-linear production function. Furthermore, the authors propose that three commonly used economic presumptions cannot hold in the same framework. These presumptions are “single primary input”, “fixed-proportion inputs” and “law of diminishing marginal returns”.