Chapter 2 (exam 1)

Suppose each of the following rows represents the choice faced by policy makers given the current set of U.S institutions and technology. What is the opportunity cost of reducing unemployment from 8 to 4 percent?

6 percentage points 10-4

If U.S production of corn was 60 million bushels in 2002 and 100 million bushels in 2003, what was the percentage change in corn production from 2002 to 2003?

66.67

Suppose country X reports agricultural goods to Country Y in exchange for industrial goods. This pattern of trade increases consumption in both countries only if

X's production possibility curve is B and Y's A

If you move from a point inside the production possibility curve to a point on the production possibility curve, it follows that efficiency is:

increased because the economy is now on the production possibility curve

An economy that operates inside its production possibility curve is less efficient than it would be if it were operating on its production possibility curve. True or false?

true

Productive efficiency is not achieved at any point inside the production possibility curve. True or false?

true

Laura's production possibility curve for math and economics problems in one night is shown in the graph. Her opportunity cost of finishing six math problems instead of four math problems is:

one economics problem

If a production possibility curve representing a trade-off between a grade in English and a grade in math has as negative slope, we know that

there is an inverse relationship between grades in English and grades in math

In the linear equation=mx+b, an increase in b will

shift the curve up

Exchange Rates and Comparative Advantage

- The U.S. comparative advantage in innovation results in higher wages in the U.S. -As industries mature, they move to low-wage areas -In order to regain our comparative advantage, the U.S. wage premium will have to decline. The U.S. exchange rate will likely decline or there will be large increases in foreign wages-or both. -Exports will then be cheaper for foreigners and foreign products imported will be more expensive.

Summery

- The production possibility curve illustrates maximum outputs from a given number of inputs -To get increasing amounts of something, we must give up ever-increasing quantities of something else - Trade allows people to use their comparative advantage and shift out society's PPC -Efficient, inefficient, and unattainable points on the PPC - Through specialization and trade, countries can increase consumption - If the U.S. can maintain its strong comparative advantage using new technologies and innovation, lost jobs can be replaced with other high-paying jobs - Because many goods are cheaper to produce in foreign countries, production that formerly took place in the U.S. now takes place in foreign countries - Globalization is the increasing integration of economies, cultures, and institutions across the world - Production shifts to countries where it is cheapest to produce is guided by the law of one price

Distribution and Productive Efficiency

- The productive possibility curve focuses on efficiency and ignores distribution -If a method of production will change income distribution we cannot determine if that method is efficient or not (Efficiency has meaning when analyzing a particular goal) -In our society, most people prefer more to less, and many policies have relatively small distribution effects

A downward-sloping line that makes a 45 degree angle with the horizontal and vertical axes has a slope of

-1

given a production possibility curve good X (on the x-axis) and good Y (on the y-axis), the opportunity costs of increasing good X is greatest when the slope of the production possibility curve is

-6

Trade and Comparative Advantage

-The PPC is bowed outward because individuals specialize in the production of goods for which they have a comparative advantage -For a society to produce on its PPC, individuals must produce those goods for which they have a comparative advantage and trade for other goods -According to Adam Smith, humankind's proclivity to trade leads to individuals using their comparative advantage

Application: U.S. Textile Production and Trade

-Two hundred years ago, the U.S. had a comparative advantage in textile production -Now, countries with cheaper labor, such as Bangladesh, have the comparative advantage in textiles -The gains from trade are higher wages for Bangladesh workers and lower-priced cloth for U.S. consumers

The Benefits from Trade

-When people freely enter into trade, both parties can be expected to benefit from trade -Without trade, each country can only consume those combinations of goods along their PPCs -If each country specializes according to comparative advantage and trades, they can consume beyond their "no-trade" PPCs

What is 25 percent of 400?

100

Refer to the graph. Suppose that the opportunity cost of producing 10 chickens is always 8 turkeys. Given this, the relevant production possibly curve must

2 (a straight line downward)

With the resources available, you can make the combinations of Ums and Umies (trinkets from a place called Bandarban) shown in the table. The opportunity cost of producing 60 Umies instead of 30 Umies is: Number of Ums: 60 40 20 0 Number of Umies; 0 30 60 90

20 ums

The production possibility curves of tow countries are given: Refer to the production possibility curve of the two countries. If they specialized and traded, which of the following is the largest bundle each country could have?

30 chocolates and 30 textiles

Evan can grow both roses and carnations in his garden. His production possibility table is shown below. If he is currently producing 110 roses, his opportunity cost of producing 40 more roses is: Number of Roses: 0 60 110 150 180 Number of Carnation: 155 135 109 78 0

31 carnations

The production possibility table below is for growing broccoli and asparagus in a 320 square foot garden in one section: Broccoli: 30 20 10 0 asparagus:0 18 26 30 Which curve on the graph above corresponds to the table?

4 (bowed outward, farthest one)

suppose each of the following rows represents the choice faced by policy makers given the current set of U.S. institutions and technology. What is the opportunity cost of reducing unemployment from 8 percent to 4 percent?

6 percent points of inflation

production possibility curve (PPC)

A line which shows the different combinations of two goods an economy can produce if all resources are used up.A curve meaning the combination of outputs that can be obtained from a given number of inputs -It gives you a visual picture of the trade-off embodied in a decision -created from a production possibility table by mapping the table in a two-dimensional graph - Demonstrates that there is a limit to what you can achieve, given existing institutions, resources, and technology and that every choice you make has an opportunity cost

comparative advantage

A resource if it is better suited to the production of one good than to the production of another good. The ability to be better suited to the production of one good than to the other production of another good -The reason we must give up more and more butter as we produce more guns is that some resources are relatively better suited to producing guns, while others are relatively better suited to producing butter

John can clean the house in three hours and do the laundry in four. Jane can clean the house in two hours or do the laundry in two. Can they benefit by specialization and trade?

Both can benefit because John has a comparative advantage in cleaning

If the principle of increasing marginal opportunity cost holds, the opportunity cost of producing each additional unit of a good should fall as production of that good rises. True or false?

False

The law of one price means that the price eventually will be the same in all countries and eventually countries will not have a reason to trade. True or false?

False

The production possibility curve are upward-sloping because increased production of one good implies reduced production of another good. True or false?

False

Two nations with differing comparative advantages will be able to consume more if each produces the good for which the opportunity cost is highest and trades for the good for which opportunity cost is lowest. True or false?

False

Investment in capital goods is one way to increase the standard of living in the future. Investment in capital goods, however, means that we must forgo consumption today. One of the trade-offs facing an economy is consumption today and consumption in the future. The following table presents such a trade-off. With this information we know that the opportunity cost of which of the following is the greatest? Current consumption: 800 750 650 600 550 Future consumption: 100 260 340 380 400

Increasing current consumption from 750 to 800

In the graph, what change would increase production efficiency?

Moving from C to A

In election campaigns, presidents often promise more of everything (that is, more guns and butter). What would help those elected presidents fulfill that promise?

The economy becomes more efficient

Globalization

The increasing integration of economies, cultures, and institutions across the world -2 effects on firms: A positive effect: globalization provides larger markets than the domestic economy A negative effect: the global economy increases the number of competitors for the firm

Increasing Opportunity Costs of the Trade-off

The principle of increasing marginal opportunity cost tells us that opportunity costs increase the more you concentrate on the activity - Slope is flat at A: This means there is a low opportunity cost to produce more guns - Slope is steep at: This means there is a high opportunity cost to produce more guns

Suppose that in Colombia one unit of labor can produce 8 tons of papayas or 2 tons of bananas. In Brazil, one unit of labor can produce either 4 tons of papayas or 1 ton of bananas. Given this information, which of the following statements is true

These countries cannot gain from trading

If a country has a comparative advantage in the production of a good, its resources are better suited to the production of that good than are the resources of other countries. True or false?

True

Production efficiency in not achieved at any point inside the production possibility curve. True or false?

True

The production possibility model can be used tot demonstrate the concept of opportunity cost. True or false?

True

Two nations with differing comparative advantages will be able to consume more if they specialized and trade with each other than if they did not specialized or trade with each other. True or false?

True

Which of the following cannot be determined by using a production possibility table?

What combination of outputs is best?

The production possibility frontiers of Northland and southland are given. Without trade, Northland produces and consumes 20 apples and 5 bananas and southland produces and consumes 10 apples and 40 bananas. Could they increase their consumption bundle bu optimizing production and trading?

Yes, they could gain up to 15 bananas without loosing apples

Productive efficiency

achieving as much output as possible from a given amount of inputs or resources

Laissez-faire

an economic policy of leaving coordination of individuals' actions to the market. A precept because it is based on a model and normative judgements about the relevance to the model of the real world

If a country takes advantage of the comparative advantage of some resources over others, then its production possibility curve is likely to be:

bowed outward

The graph indicates that with the resources and technology it has available, Ricardia

can produce with 40 units of rye or 20 units of eggs

production possibility model

conveys the trade-offs society faces. -can be presented both in a table and in a graph -Through specialization and trade, individuals, firms, and countries can achieve greater levels of output than they could otherwise achieve

Because you can get more of one good only by giving up some of another good, the shape of a production possibility curve is

downward sloping

inefficiency

getting less output from inputs that, if devoted to some other activity, would produce more output

The slope of a line is zero when it is

horizontal

Mexico has a comparative advantage in producing corn:

if its opportunity cost of producing corn is lower than the opportunity cost in other countries

The text argues that the United States has a comparative advantage in goods and services that

require creativity and innovation

Fill in the blanks: U.S. domestic oil consumption has been steady while imports have been (blank), therefore U.S. domestic oil production has been (blank)

rising, falling

Consider the table below, in which each production choice represent a point on a production possibly curve: Choice: A B C D E F Eggs: 10 8 6 4 2 0 Rye: 0 10 20 30 40 50 The production possibly table could be graphed as a

straight line with negative slope

If the hourly wage of U.S. workers is $16, the hourly wage of Mexican workers is $2, and U.S. workers produce 9 times as much output per hour as Mexican workers, then, other things equal, it would be efficient to locate production facilities in:

the United States since the cost [er until of output will be lower

An inverse relationship occurs between two variables when as one goes

up the other goes down

The Law of One Price

wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country -If the U.S. loses its comparative advantage based on technology and institutional structure, U.S. wages will decrease relative to wages in many other countries -The reality is that the U.S. has been living better than it could have otherwise precisely because of trade.

The slopes of the curves at point A and B (maximum and minimum) are

zero and zero