ECON 351x Chapter 2

Refer to Figure 2-2. What is the opportunity cost of one pound of vegetables? A) 3/4 pound of meat B) 1.2 pounds of meat C) 1 1/3pounds of meat D) 12 pounds of meat

A) 3/4 pound of meat

John and Paul have a budget of 10 hours each to produce good X and good Y. To produce each X, John uses 4 hours while Paul uses 3 hours. To produce each Y, John uses 2 hours while Paul uses 1 hour. Therefore, I- John has an absolute advantage in the production of both X and Y. II - John has a comparative advantage in the production of X. III - John has a comparative advantage in the production of Y. A) II is true, I and III are false B) I and III are true, II is false C) I and II are true, III is false D) II and III are true, I is false E) III is true, I and II are false

A) II is true, I and III are false John's marginal cost is = 2 Paul's marginal cost is = 3 Paul has a lower marginal cost to produce X, so he has an absolute advantage in the production of X. Paul has a lower marginal cost to produce Y, so he has an absolute advantage in the production of Y. John has a comparative advantage in the production of X because MRTJX,Y <MRTPX,Y. That is, in order to produce one extra unit of X John only has to give up the production of 2 units of Y, while Paul would have to give up the production of 3 units of Y in order to produce one extra X. As always, if John has the comparative advantage in the production of X, then it must be the case that Paul has the comparative advantage in the production of Y.

Point B is: A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination.

A) technically efficient.

Refer to Figure 2-2. What is the opportunity cost of one pound of meat? A) 3/4 pound of vegetables B) 1 1/3pounds of vegetables C) 1.6 pounds of vegetables D) 16 pounds of vegetables

B) 1 1/3pounds of vegetables

Pierre can produce either a combination of 20 bow ties and 30 neckties or a combination of 35 bow ties and 15 neckties. If he now produces 35 bow ties and 15 neckties, what is the opportunity cost of producing an additional 15 neckties? A) 2 bow ties B) 15 bow ties C) 20 bow ties D) 35 bow ties

B) 15 bow ties

Samantha and Maria can use their time to produce apple pies (A) and pecan pies (P). Samantha's marginal rate of transformation is MRTA,P = 2, while Maria's marginal rate of transformation is MRTA,P = 3. From this information, we know that A) Samantha does not have an absolute advantage in any good, neither a comparative advantage in any good. B) Samantha has a comparative advantage in the production of apple pies. C) Samantha has a comparative advantage in the production of pecan pies. D) Samantha has a comparative advantage in the production of both goods. E) Samantha has an absolute advantage in the production of both goods.

B) Samantha has a comparative advantage in the production of apple pies. Samantha has a comparative advantage in the production of apple pies.In order to produce one apple pie, Samantha only needs to give up 2 pecan pies, while Maria needs to give up 3 pecan pies. Therefore, Samantha can produce apple pies at a relatively lower opportunity cost. Samantha has a comparative advantage over Maria in the production of apple pies. Extra: This implies that Maria has a comparative advantage over Samantha in the production of pecan pies. In order to know who has an absolute advantage in the production of each good, we need to know the actual marginal cost.

Steven and Lucas have a budget of 200 hours each to produce good X and good Y. To produce each X, Steven uses 4 hours while Lucas uses 3 hours. To produce each Y, Steven uses 2 hours while Lucas uses 1 hour. Therefore, Use the information from the previous question. If Steven and Lucas were to trade with each other, which one of the following trade proposals is the most likely to be beneficial to both individuals? A) Steven gives to Lucas 1 unit of X in exchange for 1.5 units of Y. B) Steven gives to Lucas 1 unit of X in exchange for 2.3 units of Y. C) Lucas gives to Steven 1 unit of X in exchange for 1.5 units of Y. D) Lucas gives to Steven 1 unit of X in exchange for 2.3 units of Y

B) Steven gives to Lucas 1 unit of X in exchange for 2.3 units of Y. Steven gives to Lucas 1 unit of X in exchange for 2.3 units of Y.We know from the previous question that Steven has the comparative advantage in the production of X, while Lucas has the comparative advantage in the production of Y. Therefore Steven must give X to Lucas in exchange for Y. Also from the previous question, we know that MRTSX,Y = 2 and MRTLX,Y = 3. Therefore, in order to be beneficial to both individuals, the exchange must be 1 unit of X for a quantity of Y between 2 and 3.

The production possibilities frontier shows the ________ combinations of two products that may be produced in a particular time period with available resources. A) minimum attainable B) maximum attainable C) only D) equitable

B) maximum attainable

Steven and Lucas have a budget of 200 hours each to produce good X and good Y. To produce each X, Steven uses 4 hours while Lucas uses 3 hours. To produce each Y, Steven uses 2 hours while Lucas uses 1 hour. Therefore, _________ has the absolute advantage in the production of X; _________ has the absolute advantage in the production of Y; _________ has the comparative advantage in the production of X; _________ has the comparative advantage in the production of Y; A) Steven; Steven; Lucas; Steven B) Steven; Steven; Steven; Lucas C) Lucas; Lucas; Steven; Lucas D) Lucas; Lucas; Lucas; Steven E) None of the above

C) Lucas; Lucas; Steven; Lucas Steven's marginal cost is = 2 Lucas' marginal cost is = 3 Lucas has a lower marginal cost to produce X, so he has an absolute advantage in the production of X. Lucas has a lower marginal cost to produce Y, so he has an absolute advantage in the production of Y. Steven has a comparative advantage in the production of X because MRTSx,y < MRTLx,y. That is, in order to produce one extra unit of X Steven only has to give up the production of 2 units of Y, while Lucas would have to give up the production of 3 units of Y in order to produce one extra X. As always, if Steven has the comparative advantage in the production of X, then it must be the case that Lucas has the comparative advantage in the production of Y.

Increasing opportunity cost is represented by a ________ production possibilities frontier. A) linear B) bowed in C) bowed out D) vertical

C) bowed out

Point A is: A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination.

C) inefficient in that not all resources are being used.

Steven and Lucas have a budget of 200 hours each to produce good X and good Y. Steven uses 3 hours to produce each X and 3 hours to produce each Y. Lucas uses 4 hours to produce each X and 2 hours to produce each Y. Therefore, Use the information from the previous question, and consider the following trade proposal: "Steven gives 1 units of X to Lucas, in exchange for 3 units of Y from Lucas." This proposal would most likely? A) Be accepted by both Steven and Lucas B) Be rejected by both Steven and Lucas C) Be accepted by Lucas but rejected by Steven D) Be accepted by Steven but rejected by Lucas E) The proposal would be accepted by both Steven and Lucas if it was changed to: "Steven gives 1.5 units of X to Lucas, in exchange for 1 unit of Y from Lucas."

D) Be accepted by Steven but rejected by Lucas The trade proposal would be rejected by Lucas. The trade proposal states that Lucas would give up 3 units of Y in exchange for one unit of X from Steven. However, for Lucas, MRTLX,Y = 2, which means that by producing himself he only needs to give up 2 units of Y for one X, not 3 units of Y.The trade proposal would be accepted by Steven. The trade proposal states that Steven would give up 1 unit of X in exchange for 3 units of Y from Lucas. Since for Steven MRTSX,Y = 1, by producing himself he only obtains one Y for each X, so receiving 3 units of Y from Lucas is better.In order to be beneficial to both consumers, the trade must be one X for some amount of Y between 1 and 2 (between the MRTX,Y of both players). Note that the trade proposal 1.5 units of X for 1 unit of Y is equivalent to the ratio 1 unit of X for 2/3 units of Y (1 divided by 1.5 equals 2/3), so it is not beneficial to both individuals.

The production possibilities frontier model shows that A) if consumers decide to buy more of a product its price will increase. B) a market economy is more efficient in producing goods and services than is a centrally planned economy. C) economic growth can only be achieved by free market economies. D) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

D) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

If the production possibilities frontier is ________, then opportunity costs are constant as more of one good is produced. A) bowed out B) bowed in C) non-linear D) linear

D) linear

The slope of a production possibilities frontier A) has no economic relevance or meaning. B) is always constant. C) is always varying. D) measures the opportunity cost of producing one more unit of a good.

D) measures the opportunity cost of producing one more unit of a good.

Steven and Lucas have a budget of 200 hours each to produce good X and good Y. Steven uses 3 hours to produce each X and 3 hours to produce each Y. Lucas uses 4 hours to produce each X and 2 hours to produce each Y. Therefore, I - Steven has no comparative advantage; II - Steven has an absolute advantage in the production of X; III - Steven has an absolute advantage in the production of Y; A) I is true, II and III are false B) I and III are true, II is false C) II is true, I and III are false D) I and II are true, III is false E) None of the above

II is true, I and III are false Steven's marginal cost is MCSX = 3 and MCSY = 3, so MRTSX,Y = MCSX / MCSY= 3 / 3 = 1. Lucas' marginal cost is MCLX = 4 and MCLY = 2, so MRTLX,Y = MCLX / MCLY = 4 / 2 = 2. Steven has a lower marginal cost to produce X, so he has an absolute advantage in the production of X. Lucas has a lower marginal cost to produce Y, so he has an absolute advantage in the production of Y. Steven has a comparative advantage in the production of X because MRTSX,Y < MRTLX,Y. That is, in order to produce one extra unit of X Steven only has to give up the production of 1 unit of Y, while Lucas would have to give up the production of 2 units of Y in order to produce one extra X. As always, if Steven has the comparative advantage in the production of X, then it must be the case that Lucas has the comparative advantage in the production of Y.

Using the same amount of resources, the Unites States and Canada can both produce lumberjack shirts and lumberjack boots, as shown in the following production possibilities frontiers: a. Who has a comparative advantage in producing lumberjack boots? Who has a comparative advantage in producing lumberjack shirts? Explain your reasoning. b. Does either country have an absolute advantage in producing both goods? Explain. c. Suppose that both countries are currently producing 3 pairs of boots and 3 shirts. Show that both can be better off if they each specialize in producing one good and then engage in trade.

a. Canada has the comparative advantage in making boots. Canada's opportunity cost of making 1 boot is giving up 1 shirt. In the United States, the opportunity cost of making 1 boot is giving up 3 shirts. The United States has the comparative advantage in making shirts. In the United States, the opportunity cost of making one shirt is giving up 1/3 boot, but Canada's opportunity cost of making 1 shirt is 1 boot. b. Neither country has an absolute advantage in making both goods. The United States has the absolute advantage in shirts, but Canada has the absolute advantage in boots. Remember, both countries have the same amount of resources. If each country puts all its resources into shirts, then the United States makes 12 shirts, but Canada makes only 6 shirts. If each country puts all its resources into boots, then Canada makes 6 boots, but the United States makes only 4 boots. c. If each country specializes in the production of the good in which it has a comparative advantage and then trades with the other country, both will be better off. Let's use the case in which each country trades half of what it makes for half of what the other makes. The United States will specialize by making 12 shirts and Canada will specialize by making 6 boots. Because each gets half of the other's production, they both end up with 6 shirts and 3 boots. They are better off than before trading because they end up with the same number of boots, but twice as many shirts. Other trades will also make them better off.

Suppose that France and Germany both produce schnitzel and wine. The following table shows combinations of goods that each country can produce in a day. a. Who has a comparative advantage in producing wine? Who has a comparative advantage in producing schnitzel? b. Suppose that France is currently producing 1 bottle of wine and 6 pounds of schnitzel, and Germany is currently producing 3 bottles of wine and 6 pounds of schnitzel. Demonstrate that France and Germany can both be better off if they specialize in producing only one good and then engage in trade.

a. When France produces 1 more bottle of wine, it produces 2 fewer pounds of schnitzel. When Germany produces 1 more bottle of wine, it produces 3 fewer pounds of schnitzel. Therefore, France's opportunity cost of producing wine—2 pounds of schnitzel—is less than Germany's—3 pounds of schnitzel. When Germany produces 1 more pound of schnitzel, it produces 0.33 fewer bottles of wine. When France produces 1 more pound of schnitzel, it produces 0.50 fewer bottles of wine. Therefore, Germany's opportunity cost of producing schnitzel—0.33 bottles of wine—is less than that of France—0.50 bottles of wine. We can conclude that France has the comparative advantage in making wine and that Germany has the comparative advantage in making schnitzel. b. We know that France should specialize where it has a comparative advantage and Germany should specialize where it has a comparative advantage. If both countries specialize, France will make 4 bottles of wine and 0 pounds of schnitzel, and Germany will make 0 bottles of wine and 15 pounds of schnitzel. After both countries specialize, France could then trade 3 bottles of wine to Germany in exchange for 7 pounds of schnitzel. France will have the same amount of wine as they initially had, but 1 more pound of schnitzel. Germany will have 3 bottles of wine and 8 pounds of schnitzel—that is, the same amount of wine, but 2 more pounds of schnitzel. Other mutually beneficial trades are possible as well.