chapter 2 Microeconomics
In the diagram to the right, point F indicates an ______
inefficient results
We can show economic inefficiency:
with points inside the production possibilities frontier
The basis for trade is _________ advantage.
comparative
We can show economic efficiency:
with points on the production possibilities frontier.
How can a country gain from specialization and trade?
A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.
Tom's lawn service specializes in mowing lawns and trimming bushes. Tom has 4 hours to devote to lawn services. In 1 hour, he can mow 4 lawns or trim 6 bushes. Use the line drawing tool to graph Tom's production possibilities frontier given he has 4 hours to devote to lawn services. Properly label this line. Carefully follow the instructions above, and only draw the required objects. Tom's opportunity cost of mowing lawns in terms of trimming bushes is ______ trimmed bushes per mowed lawn. (Enter your response rounded to two decimal places.)
1.50
suppose that France is currently producing 1 bottle of wine and 9 pounds of cheese and Germany is currently producing 3 bottles of wine and 8 pounds of cheese. Then, assume instead that France and Germany specialize by producing only the good for which they have a comparative advantage and then trade 3 bottles of wine for 11 pounds of cheese. After specialization and trade, France gains by consuming the same amount of wine and ______ additional pound(s) of cheese (enter a numeric response using an integer) and Germany gains by consuming the same amount of wine and _____ additional pound(s) of cheese.
2, 1
Refer to the graph. What is the opportunity cost of moving from point B to point C?
20 sedans
From the PPFs shown above it can be determined that the opportunity cost of oil is lower in country
A
What is an entrepreneur?
Entrepreneurs operate businesses that produce goods and services.
According to Adam Smith, which of the following is necessary for the proper functioning of the market system?
For markets to work, people must be free to pursue their self-interest.
Suppose that France and Germany both produce wine and cheese. The table below shows combinations of the goods that each country can produce in a day. Who has the comparative advantage in producing wine and who has the comparative advantage in producing cheese?
France has a comparative advantage producing wine and Germany has a comparative advantage producing cheese.
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 is absolute advantage?
The ability to produce more of a good or service than competitors using the same amount of resources.
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy?
The country is operating on its production possibilities frontier.
What are the implications of this idea for the shape of the production possibilities frontier?
The production possibilities frontier will be bowed outward
Why do entrepreneurs play a key role in a market system?
They bring together factors of production.
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.
A production possibilities frontier (PPF) is
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
an independent court system
Your neighbor's consumption point before trade is illustrated by point
b
Your neighbor's consumption point after trade is illustrated by point ___
b
The production possibilities frontiers depicted in the diagram to the right illustrate
both the labor force and capital stock increasing
An economist remarks that "the cost of consuming a book is the combination of the retail price and the opportunity cost of the time spent reading." Source: Craig L. Garthwaite, "Demand Spillovers, Combative Advertising, and Celebrity Endorsements," American Economic Journal: Applied Economics, Vol. 6, No. 2, April 2014, p. 78. The cost of _____ a book is the price you pay to buy the book, but the cost of _____ a book would include the time spent reading the book.
buying, consuming
What is the basis for trade?
comparative advantage
After these two countries specialize and trade with each other, country A will be importing
corn
Given the comparative opportunity costs as revealed by the PPFs shown above, the comparative advantage for country B lies in ______
corn
In the diagram to the right, point C indicates an
efficient results
is someone who operates a business, bringing together the factors of production—labor, capital, and natural resources—to produce goods and services.
entrepreneur
In economic terminology, the inputs used to produce output are referred to as
factors of production.
What are the two main categories of participants in markets?
firms and households
Two key groups participate in markets. A ____ consists of all the individuals in a home. ____ are suppliers of goods and services. We can use a simple economic model called the ____ to see how participants in markets are linked.
household, firm, circular flow diagram
Which participants are of greatest importance in determining what goods and services are produced?
households
The production possibilities frontier will shift outward
if technological advances occur
What is the outcome of enforcing contracts and property rights in a market system?
increased economic activity
On the diagram to the right, movement along the curve from points A to B to C illustrates
increasing marginal opportunity costs.
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
Whether carried out by an individual or a country, production beyond the production possibilities frontier
is not physically possible
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could
In economics, the term capital refers to
physical capital, such as machinery, that is used to produce other goods
According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?
prices
The primary difference between product markets and factor markets is that
product markets are markets for goods, while factor markets are markets for factors of production—labor, capital, natural resources, and entrepreneurial ability.
A production possibilities frontier
shows the maximum attainable combinations of two goods that may be produced with available resources.
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 production possibilities frontiers depicted in the diagram to the right illustrate
technological advances in the tank industry.
One of the great benefits of trade is
that it makes it possible for society to become better off by increasing its consumption.
What is comparative advantage?
the ability to produce a good or service at a lower opportunity cost than other producers
What are private property rights? Private property rights are:
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property
Property rights are
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
A free market exists
when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed.
Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good
will have a comparative advantage if it has a lower opportunity cost of producing that good.
With respect to consumption, individuals and countries
can, through trade, consume beyond their production possibilities frontiers.
The people of a previously quiet and peaceful country have come to recognize the need to expand and improve their security forces after a wave of terroristic threats and acts. Considering their resource limitations, the extent to which security is enhanced will most likely be determined by
society's willingness to forego other goods and services, both public and private.
