ECON 101 Chapter 2

Allocative Efficiency

Allocating our resources to produce the kinds of goods and services we want the most

Economic Model

An abstract description of a part of an economy; simplifying assumptions are made, with a goal of understanding and explaining economic events

Production Possibilities Frontier

An economic model showing possible combinations of outputs, given resources and technology

Diminishing Marginal Returns

Increasing one input, while holding all other inputs constant, will eventually result in smaller and smaller additions to output

Principle of Increasing Marginal Costs

The cost of each additional unit of output increases because the opportunity cost of what could have been made with a unit of input increases

Marginal Cost

The opportunity cost of producing one additional unit of output

Opportunity Cost

The value of the best forgone alternative; it is what one gives up doing when making a choice

Economic Efficiency

Using all of our resources in a technically and allocatively efficient manner

Technical Efficiency

Using methods to produce goods and services that minimize costs of producing or maximize output given our inputs

Is it possible to have allocative efficiency without technical efficiency? Yes/No

Yes

As resources are moved from the production of one good to another, we would normally expect the cost of producing one more unit of the new good to... a. Increase b. Decrease c. Not change

a. Increase

Which of the following best describes the relationship between diminishing marginal returns and marginal cost? a. Marginal returns must increase as output increases due to diminishing marginal return b. If marginal returns are diminishing while output increase, marginal cost must be decreasing c. Marginal cost must increase as output decreases because of diminishing marginal returns d. Marginal returns diminish as output increases, and thus marginal cost must decrease

a. Marginal returns must increase as output increases due to diminishing marginal return

If a production process follows diminishing marginal returns, and an individual produces 10 units in the first hour, how many units they will produce in the second hour? Select all that apply. a. 8 units b. 9 units c. 10 units d. 11 units

a. and b.

Which of the following are examples of diminishing marginal returns? Select all that apply. a. Chopping fewer bundles of wood each hour because you are tired b. With each additional hour that a hiker walks they cover fewer and fewer miles in that hour c. A machine is used to place caps on bottles at a rate of 100 per hour. After 5 hours, the machine still places 100 caps on bottles

a. and b.

A firm produces pencils or pens. Three workers can produce a total of 10 pens per hour, four workers produce a total of 14 pens per hour, and 5 workers can produce a total of 16 pens per hour. Likewise, three workers can produce a total of 10 pencils per hour, four workers produce a total of 14 pens per hour, and five workers can produce a total of 16 pens per hour. The firm has a total of eight workers and three workers are producing pens and five workers are producing pencils. What is the marginal cost of increasing the production of pens from 10 pens per hour to 14 pens per hour? a. 4 pencils per hour b. 2 pencils per hour c. 16 pencils per hour d. 14 pencils per hour

b. 2 pencils per hour

A company could produce t-shirts for a $500 profit, long sleeved shirts for a $350 profit, hoodies for a $200 profit, or socks for a $50 profit. If they can only produce on of these four options, what is the opportunity cost of producing t-shirts? a. $600 b. $550 c. $350 d. $200

c. $350

A firm produces pencils or pens. Three workers can produce a total of 10 pens per hour, four workers produce a total of 14 pens per hour, and five workers can produce a total of 16 pens per hour. Likewise, three workers can produce a total of 10 pencils per hour, four workers produce a total of 14 pens per hour, and five workers can produce a total of 16 pens per hour. The firm has a total of eight workers and four workers are producing pens and four workers are producing pencils. What is the marginal cost of increasing the production of pens from 14 pens per hour to 16 pens per hour? a. 14 pencils per hour b. 12 pencils per hour c. 4 pencils per hour d. 2 pencils per hour

c. 4 pencils per hour

If the opportunity cost of an action is greater than the benefits of that action, we would describe the effects on the economy as... a. Technically inefficient b. Allocatively inefficient c. Economically inefficient d. Technically inefficient and allocatively inefficient e. Allocatively inefficient and economically inefficient

e. Allocatively inefficient and economically inefficient