Final answer:
The shape of the production function actually reflects the law of diminishing returns, not increasing marginal returns. The law of diminishing returns indicates that additional output from extra inputs diminishes once a certain point is reached, which can be seen on the production possibilities frontier (PPF), reflecting a country's productive and allocative efficiency.
Step-by-step explanation:
The statement that the shape of the production function reflects the law of increasing marginal returns is false. The correct economic principle that affects the production function's shape is called the law of diminishing returns. This law proposes that in the production of goods, as more units of a variable input, like labor or capital, are added to fixed amounts of other resources, the additional output produced by these additional inputs will eventually decline.
The production possibilities frontier (PPF) graphically represents this scenario. As resources are reallocated from producing one good to another, the gains from reallocation are large at first, but as more and more resources are reallocated, these gains diminish. This leads to an outward-bending curve of the PPF. The PPF curve demonstrates productive efficiency and allocative efficiency, indicating that resources are used in the most efficient way and in the preferred mix of goods, respectively. When a country specializes in goods for which it has a comparative advantage and trades for other goods, it can increase its total production beyond its own PPF.