Ch 1

The price of each ride at the fair is $7. Your benefit associated with each ride decreases with each ride because you start to get dizzy. How many rides should you go on if your marginal benefit for each ride is as follows- first ride: $25, second ride: $18, third ride: $11, fourth ride: $4, fifth ride: $0?

3 rides According to the data given, your marginal benefit is greater than the marginal cost for the first three rides. After the third ride, the marginal cost exceeds your marginal benefit. Therefore, the best choice is to stop at three rides.

What is the opportunity cost if we move from Point A to Point B?

5 guns As we move down along the production possibilities curve, the opportunity cost of increasing production of one good by the same amount, leads to an increase in the amount of the alternative good that we must give up. As we move from Point A to Point B, to gain 10 more units of butter, we only give up 5 guns.

If the production of wheat increases from point B to point A, what is the opportunity cost?

55 tons With an increase in wheat from point B to point A (75 to 90 tonnes of wheat), the production of steel decreases from 75 to 20 tons of steel, thus the opportunity cost is 55 tons of steel.

Which country has a comparative advantage in the production of coffee?

Colombia Clearly, Colombia has a lower opportunity cost of producing coffee (in terms of beef) than the U.S. The curvature of a country's PPF gives us information about the tradeoff between devoting resources to producing one good versus another good. In particular, its slope gives the opportunity cost of producing one more unit of good in the x-axis in terms of the other good (in the y-axis). The U.S. PPF is flatter than the Colombia PPF implying that the opportunity cost of beef in terms of coffee is lower in the U.S. than in Brazil. Conversely, the opportunity cost of coffee is lower in Colombia. The U.S. has comparative advantage in beef and Colombia has comparative advantage in coffee.

Identify the two groups that do not interact in a circular flow diagram for a two-sector economy.

Exporters Importers A circular flow diagram shows the interactions and flow of goods, services, and money between households and businesses (or firms). In a two-sector economy there are firms and households. Firms provide households with goods and services. Households provide firms with labor, land, capital, and entrepreneurship. Households do not receive free goods or services from firms, and households do not provide firms with free labor. Everything has a cost.

If Mary has a budget of $12 to spend on soda and pizza and if sodas cost $1 and slices of pizza cost $1.50, Mary's budget constraint can be written as 12=Psoda×1+Ppizza×1.50, where P represents a price.

False

In underground economies, governments are heavily involved in making decisions on the goods sold and the prices set.

False

A microeconomist would focus their studies on levels of exports and imports.

False Levels of exports and imports is a topic that falls under the study of macroeconomics, not microeconomics. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.

Point R and Q both demonstrate productive efficiency.

False Only points on the PPF are considered to demonstrate productive efficiency. Because R is inside the PPF, it is not a point that shows productive efficiency, however Q is.

If the Netherlands enjoys comparative advantage in the production of dairy products, it implies that the opportunity cost of producing dairy products in the Netherlands is greater than that of its trading partners.

False The opportunity cost is lower in the country that has comparative advantage.

_______________ is the expanding cultural, political, and economic connections between people around the world.

Globalization Recent decades have seen a trend toward globalization, which is the expanding cultural, political, and economic connections between people around the world. One measure of this is the increased buying and selling of goods, services, and assets across national borders—in other words, international trade and financial capital flows.

What is the opportunity cost of owning a business? I. The economic profits that the business earns II. The accounting profits that the business earns III. The profits that could be earned in another business using the same amount of resources

III only Opportunity cost is the value of the best alternative forgone in making any choice. When owning a business, the profits that could be earned in another business using the same amount of resources are the opportunity cost.

Anna has a fixed budget for entertainment for the year and likes movies and concerts. If Anna spends her entire budget on movies, she can go to 70 movies. If she spends her entire budget on concerts, she can go to 35 concerts. What is the opportunity cost of a concert?

If Anna is spending her entire entertainment budget and goes to a concert, then she must give up 70/35=2 movies.

What is the opportunity cost of increasing the number of computers from 14 to 15?

If we move from point B to point A, we increase production of computers by one unit. Because the slope is relatively steep here, the number of televisions decreases by 5, going from 5 units produced to 0 units produced. At this point all of the resources are being directed to production of computers.

Which scenario is asking you to apply marginal analysis?

It costs $3 to go down the water slide. The first time you go down the slide, you are really excited, but your interest decreases each time you go down. How many times should you go down the water slide? Marginal analysis involves comparing marginal benefits and marginal costs to determine the optimal outcome.

Which two explanations represent models in the study of economics?

Models simplify real world interactions for the purposes of illustration. Economic models are used to test theories. Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. Economic models are not perfect; rather, they simplify real-world interactions for the purposes of illustration and are used to test theories. Because economics is not a hard science, its models and theories are also not based entirely on facts. They require assumptions and interpretations about human behavior, which may not always be provable or objectively factual.

According to this production possibility frontier, which choices display productive efficiency?

P, R, and S All countries should want make a choice that shows productive efficiency. A choice that is somewhere on the production possibility frontier rather than inside it is considered productively efficient. Of the choices provided, P, R, and S demonstrate productive efficiency because they are on the PPF.

According to this production possibilities frontier, which of the following statements are true about point Q?

Point Q is not considered to demonstrate productive efficiency. Points are only considered to have productive efficiency if they are located on the production possibilities frontier. Point Q is within the PPF, thus it does not demonstrate productive efficiency.

Giovanni and Pedro make guitars. Their current rate of production is 2 guitars a week: each of them makes one guitar. How would production most likely be affected if Pedro made the frets and tuning pegs on the guitars, and Giovanni made the guitar bodies?

Production would be increased. When workers specialize, each is likely to become more efficient at the task each specializes in. As Giovanni and Pedro become more efficient at the production of guitars, they will produce more per week. Workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

According to Adam Smith, specialization results in higher levels of output for all of the following reasons except:

Specialization allows workers to experiment with different tasks to see which responsibilities make them happiest at work. Specialization results in higher levels of output because it allows workers to focus their labor where they have an advantage and potentially learn to produce more quickly in their areas of specialization. Additionally, firms may be allowed to take advantage of economies of scale because of specialization. However, specialization does not necessarily contribute to making workers more happy at work.

Illustrates an example of scarcity.

The value for ivory has increased leading to an increase in the poaching of African Elephants and a decrease in the African Elephant population. When we have limited availability of a given resource, we say that the resource is in scarce supply. Elephants are becoming a scarce resource due to the high demand for their tusks. They are killed by poachers that are only interested in their tusks. The other options in the question are examples of situations where scarcity is not present - the wolf population has grown since reintroduction, there are a number of craft breweries in Portland, and with generic drugs on the market, they are more readily available.

Identify one key takeaway from the Circular Flow Diagram.

There are no free exchanges between firms and households.

The production possibilities frontier (PPF) demonstrates how society's limited resources affect the quantities of goods and services produced.

True Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. The production possibilities frontier demonstrates this tradeoff.

The slope value is always the same at every point on a budget line but can be different at various points on a production possibilities frontier.

True The budget constraint is a straight line. This is because its slope is given by the relative prices of the two goods, which from the point of view of an individual consumer, are fixed. In contrast, the PPF has a curved shape because of the law of diminishing returns. Thus, the slope is different at various points on the PPF.

The opportunity cost of increasing production from 20 cameras to 30 cameras is 4 mobile phones.

True In order to move from point B to point C, the economy must move resources from producing mobile phones to cameras. In order to produce 10 more cameras they must move from 7 to 3 mobile phones, thus the the opportunity cost is 4 mobile phones.

Which of the following describe benefits of international trade?

Worldwide production increases. The worldwide economy improves. Worldwide standards of living are higher.

What is the best definition of an underground economy?

a market where the buyers and sellers make transactions without the government's approval. Heavily regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government's approval.

The law of diminishing returns states that the marginal productivity of additional resources employed_________________.

can be high initially but will eventually decrease The law of diminishing returns states that as additional increments of resources are added, the marginal benefit will decline. The reason for the decline, as pertains to the PPF curve, is that as resources are switched from the production of one good to another, the specialization of resources is an obstacle. Consider moving an engineer from designing robots to making food processors. The engineer may not be as productive working in areas he/she does not have as much experience or knowledge in.

The production possibilities frontier has a __________ due to the law of diminishing returns.

curved shape

In the circular flow, households are on the receiving end of payments for goods and services.

false

Graphs are rarely used to express economic models.

false Graphs and mathematic equations are often used to express economic models. However, models do not need to be expressed graphically or mathematically to be valid.

In a circular flow diagram, who pays wages?

firms

The division of labor may also be referred to as human specialization. Overall, it is beneficial to firms because it ____________.

increases output by enabling workers to take advantage of differences in their skills

The Department of Agriculture estimated that the expenditures a middle-income, husband and wife family of three would incur to raise one additional child from birth in 2005 to age 17 would be $250,530. What type of analysis does this scenario involve?

microeconomics This is a problem in microeconomic analysis, because it focuses on the choices of individual households.

Opportunity cost is defined as ___________________________.

the measure of cost by what is given up in exchange for what is obtained The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else. In short, opportunity cost is the value of what we give up in order to have it.

The division and specialization of labor has been a force against the problem of scarcity.

true The division and specialization of labor has helped combat the issue of scarcity. When workers can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations, society can produce and consume far more than if each person tried to produce all of their own goods and services.