ECON Chapter 2
Table 2-9 One Wristwatch Rice (per pound) Japan 50 hours 2 hours Thailand 30 hours 1.5 hours Table 2-9 shows the number of labor hours required to produce a wristwatch and a pound of rice in Japan and Thailand. Refer to Table 2-9. What is Japan's opportunity cost of producing one wristwatch?
25 pounds of rice
_______ behavioral assumption about humans was that people usually act in a rational, self-interested way.
Adam's Smith
What are the two main categories of participants in markets?
Firms and households.
Which participants are of greatest importance in determining what goods and services are produced?
Households.
For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries?
Switzerland has the comparative advantage in watches.
In his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations," Adam Smith notes that specialization increases productivity. Which of the following was the cause of this phenomenon?
The division of labor
What are the implications of this idea for the shape of the production possibilities frontier?
The production possibilities frontier will be bowed outward.
According to the theory of comparative advantage, specialization and free trade will benefit:
all trading partners who specialize in goods where they have comparative advantage
A product produced in a foreign country and purchased by residents of the home country is called:
an import
A production possibilities frontier with a ________ shape indicates increasing opportunity costs as more and more of one good is produced
bowed outward
Which of the following statements about an entrepreneur is true?
develops the vision for the firm and funds the producing unit
In the circular flow model of the economy, __________ are the suppliers of goods and services.
firms
If a country has a comparative advantage in the production of a good, then that country:
has a lower opportunity cost in the production of that good
The production possibilities frontier will shift outward
if resources are used to produce capital goods
Contracts, insurance, patents and accounting rules are:
inventions that make a market work better
The ability to exercise control over one's own resources within the confines of the law refers to
one's property rights.
When nations specialize in their comparative advantage and engage in trade:
overall standards of living increase
In a production possibilities frontier, a point inside the frontier is
productively inefficient.
Firms
sell goods in the product market.
Two key groups participate in markets:
1. Households are all the individuals in a home. A household may consist of one person or several persons. Households are suppliers of factors of production—particularly labor—employed by firms to make goods and services. Households use the income they receive from selling the factors of production to purchase the goods and services supplied by firms. 2. Firms are suppliers of goods and services. Firms use the funds they receive from selling goods and services to buy or hire the factors of production needed to make the goods and services.
As the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in tank production.
Increasing marginal opportunity costs occur because some workers, machines, and other resources are better suited to one use than to another As a result, the increases in automobile production become increasingly smaller, while the decreases in tank production become increasingly larger
Why do entrepreneurs play a key role in a market system?
They bring together factors of production.
The primary purpose of patents and copyrights is to
encourage the expenditure of funds on research and development to create new products.
What does increasing marginal opportunity costs mean?
Increasing the production of a good requires larger and larger decreases in the production of another good.
What are copyrights designed to accomplish?
Protect intellectual property rights
When the amount of resources increases, the economy's production possibilities frontier shifts outward, making it possible to produce both more automobiles and more tanks.
Similarly, technological change makes it possible to produce more goods with the same number of workers and the same amount of machinery, which also shifts the production possibilities frontier outward. Technological change need not affect all sectors equally.
What is the circular-flow diagram and what does it illustrate?
The circular-flow diagram shows how households and firms are linked through product and factor markets.
Which of the following is critical to the success of the market system?
To allow individuals or firms to have exclusive use of their property
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the _ the payoff to devoting additional resources to that activity.
smaller
The role of the entrepreneur always involves:
taking risks
What is a free market?
A free market is one where the government does not control the production of goods and services
What is an entrepreneur?
Entrepreneurs operate businesses that produce goods and services.