Micro economics chapter 2

An economic transaction in which one party trades a good or service for another good or services is called

barter.

Economists often disagree on all of these EXCEPT:

positive economics.

Kate and Sarah own a bakery together. The two figures illustrate the production possibilities available to them if they work at their bakery for 8 h a day. Answer the question using these figures. If Kate and Sarah both specialize in the good in which they have a comparative advantage, the

total production of bread will be 12 loaves, and the total production of cake will be 8 units.

Economists may disagree about policies because they:

use different economic models.

Low- and middle-income earners are typically more affected by:

value-added taxes.

In a situation in which there are technological improvements, we generally see:

a shift in the production possibility frontier outward.

Of all the points in the diagram, ________ represents a situation where the opportunity cost of producing one more unit of Good X is highest.

a) Point A

An outward parallel shift of the production possibility frontier signals:

an expansion of the productive capacity of the economy. An outward shift indicates an increase in laborors, or resource.

(Figure: Comparative Advantage) Use Figure: Comparative Advantage. Canada has an absolute advantage in producing:

apples only.

Suppose two economists are debating a tax reform bill. Both economists agree that the bill would increase the after-tax income of the top 5% of income earners; however, they disagree on whether the bill would improve the tax system.

differences in values

"Taxes should be lowered to improve the economy" is a _____ economic statement.

normative

The branch of economics that deals with how taxes should be collected from citizens is called _____ economics.

normative

Suppose that the table shows combinations of bicycles and tents that the economy of Outdoorland can produce using all of its resources and technology.

not feasible.

In a competitive market, all of the choices along the production possibility frontier display ________________ efficiency, while the specific choice on the frontier that society picks is the one with _______________ efficiency.

productive; allocative

(Table: Production of Zucchini and Eggplant in Nutley Township) Use Table: Production of Zucchini and Eggplant in Nutley Township. This table shows the production possibility frontier for Nutley Township. Suppose Nutley Township produces 15 bushels of zucchini and 45 bushels of eggplant; this combination is:

productively efficient.

(Figure: Cell Phones and Automobiles) Use Figure: Cell Phones and Automobiles. Technological improvements will likely:

shift the production possibility frontier outward to PPF2.

1) If an economy moves from a point on a PPF line to a point to the right of that PPF, what event might have occurred? a) A tornado causing tremendous damage b) The government putting new restrictions on energy production c) The economy recovering from a downtown and unemployment dropping d) A discovery of a new technology that expands production possibilities Submit

(d) a new technology must have been discovered that expands the production possibilities. Most economic models describe the relationship between two variables, simplified by holding constant other variables that may affect the relationship.

Suppose that the figure shows combinations of schools and movies, both of which cost millions of dollars, that the economy of Southland can produce using all of its resources and technology.

1

Suppose that in a day a worker in the United States can produce 10 bushels of corn or 2 shirts. In Russia a worker can produce 9 bushels of corn or 3 shirts in one day. Which of the following would benefit both the United States and Russia if trade occurred?

1 shirt for 4 bushels of corn

Vincent and Jean are two cooks who work in a village. Each of them can either bake cakes or make pizzas. Every ingredient is readily available to them, and the only scarce resource is the cooks' time.Vincent can bake 10 cakes or make 5 pizzas in an hour. Jean can bake 12 cakes or make 8 pizzas in an hour. Please answer the four questions.1 . Which cook has the absolute advantage in baking cakes?2 . Which cook has the absolute advantage in making pizzas?3 . Which cook has the comparative advantage in baking cakes?4 . Which cook has the comparative advantage in making pizzas?

1. Jean2. Jean3. Vincent4. Jean Jean can bake 1212 cakes in an hour while Vincent can only bake 1010 cakes during the same time period, so Jean can bake more cakes than Vincent with the same resources. Hence, Jean has the absolute advantage in baking cakes. Jean also has the absolute advantage in making pizzas because he can make 88 pizzas in an hour while Vincent can only make 55 in the same time interval. In other words, making each pizza takes less time from Jean compared to Vincent. Thus, Jean is making each pizza at a lower cost. Vincent's opportunity cost of baking each cake is 5/10=0.55/10=0.5 pizzas. This is because in every given hour, instead of 55 pizzas, he could bake 1010 cakes. For each cake he bakes, he has given up making 5/105/10 or 0.50.5 of a pizza. Similarly, Jean's opportunity cost of baking each cake is 8/12=0.668/12=0.66 pizzas. Hence Vincent has a lower opportunity cost of baking cakes, even though Jean has the absolute advantage. Vincent's opportunity cost of making each pizza is the number of cakes he has to forgo to be able to make 11 pizza. Vincent can bake 1010 cakes or 55 pizzas in an hour, so for every pizza he makes, he should give up baking 10/5=210/5=2 cakes. Similarly, Jean's opportunity cost of making one pizza is 12/8=1.512/8=1.5 cakes. Thus, Jean has a lower opportunity cost in making pizzas. Notice the difference between absolute advantage and comparative advantage. When a person can produce a product at a lower cost relative to another person, she is said to have an absolute advantage in producing that product. The table shows the cost of producing each unit of cake or pizza in terms of cooks' time for Vincent and Jean. Cost of 1 pizzaCost of 1 cakeVincent1/51/5 hour1/101/10 hourJean1/81/8 hour1/121/12 hour A person who can produce at a lower cost when measured in terms of opportunity cost is said to have a comparative advantage. Remember that opportunity cost encompasses everything that you must give up in order to obtain what you want, including opportunities missed from choices not made. In the example described, Vincent can spend his time on baking cakes or making pizzas. If Vincent spends his time to bake cakes, he is giving up making pizzas. Instead of baking 1010 cakes, he could make 55 pizzas. Thus, for baking each cake, he is giving up making of 5/10=0.55/10=0.5 pizzas. Hence we can conclude that the opportunity cost of baking one cake is 0.50.5 pizza. Following the same line of reasoning we can calculate the opportunity costs of baking cakes or making pizzas for each of the two cooks. The result is displayed in the table. Opportunity cost of making 1 pizzaOpportunity cost of baking 1 cakeVincent10/5=210/5=2 cakes5/10=0.55/10=0.5 pizzaJean12/8=1.512/8=1.5 cakes8/12=0.668/12=0.66 pizza Note that in a two-good two-party (country, person, etc.) example with different opportunity costs, it has to be the case that each party has a comparative advantage over the other party in one of its productions, meaning trade will always help both parties. This is true even if one party has absolute advantage over another party in producing all goods. Even though Jean is better at both, specializing and trading means that Vincent can avoid making pizzas, and thus the village production of both cakes and pizzas improves.

Assume Sweden and Morocco can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in Sweden can produce 10 t of grain or 5 t of dates in a season. Each farmer in Morocco can also produce 10 t of grain or 25 t of dates. Please answer the four questions. Which country has the absolute advantage in producing dates?MoroccoSwedenNeither Which country has the absolute advantage in producing grain?NeitherSwedenMorocco Which country has the comparative advantage in producing dates?NeitherSwedenMorocco Which country has the comparative advantage in producing grain?SwedenMoroccoNeither

1. Morocco Morocco needs 1 worker to produce 25 t of dates, but in Sweden, 1 worker can only produce 5 t of dates. Morocco needs fewer workers per date produced, so Morocco has the absolute advantage in producing dates. Both countries need the same number of workers to produce a certain amount of grain, so their cost would be equal. Neither of them has an absolute advantage in producing grain. Morocco's opportunity cost of producing each metric ton of dates is 10/25=0.410/25=0.4 t of grain. Sweden's opportunity cost of producing each metric ton of dates is 10/5=210/5=2 t of grain. Since it has a lower opportunity cost of producing dates, Morocco has a comparative advantage in producing dates. Sweden's opportunity cost of producing each metric ton of grain is 5/10=0.55/10=0.5 t of dates, while Morocco's opportunity cost is 25/10=2.525/10=2.5 t of dates. Thus, Sweden has a comparative advantage in producing grain. Notice the difference between absolute advantage versus comparative advantage. When one nation can produce a product at lower cost relative to another nation, it is said to have an absolute advantage in producing that product. The table shows the cost of producing each unit of produce in terms of workers' time for Sweden and Morocco. Cost of 1 t of datesCost of 1 t of grainMorocco1/25 worker1/10 workerSweden1/5 worker1/10 worker A nation which has a lower opportunity cost is said to have a comparative advantage. Remember that opportunity cost encompasses everything that you must give up in order to obtain what you want, including opportunities missed from choices not made. In the example described, workers in Sweden can spend their time on producing grain or dates. If a worker in Sweden spends her time to produce grain, she is giving up producing dates. Instead of producing 10 t of grain, she could produce 5 t of dates, so for producing each metric ton of grain, she is giving up production of 5/10=0.55/10=0.5 t of dates. Hence we can conclude that the opportunity cost of producing 1 t of grain in Sweden is 0.5 t of dates. Following the same line of reasoning, we can calculate the opportunity costs of producing grain and dates for each country. The result is displayed in the table. Opportunity cost of 1 t of datesOpportunity cost of 1 t of grainMorocco0.4 t of grain2.5 t of datesSweden2 t of grain0.5 t of dates Note that in a two-good two-country example with different opportunity costs, it has to be the case that each country has a comparative advantage over the other country in one of its productions. In other words, one country will have the comparative advantage in one good and the other country will have the comparative advantage in the other good (this is not the case with absolute advantage, as this example shows). This also means trade will always be beneficial to both countries (except in the case where the opportunity costs are equal, in which case trade will have no effect).

Select the correct definition of the term "comparative advantage." (1) When trading with more developed countries,(2)

1. the ability to produce a good or service at a lower opportunity cost than another 2. less developed countries have a comparative advantage in the production of some goods or services. Because being relatively good at producing one product implies being relatively bad at the other (in terms of opportunity cost), one trading partner always has a comparative advantage in one good, while the other has a comparative advantage in the other (unless the two partners' opportunity cost is exactly equal).

Determine if the following items represent an example of positive economics or normative economics. 1.The richest 1% of Americans should pay more taxes than the rest of the 99%. 2. A decrease in the supply of coconut will increase the price of German chocolate cake, a good which requires coconut shavings as a key ingredient. 3. The higher the minimum wage, the higher the price of goods and services is likely to be. 4. Social welfare spending in Sweden occupies too large a portion of the national budget.

1.Normative Economics 2.Positive Economics 3.Positive Economics 4.Normative Economics The distinction between positive analysis and normative analysis is in whether a matter is subjective or objective. Positive issues are of a factual nature and normative issues are matters of opinion. Comments on Sweden's social welfare spending or how much tax the richest 11% of Americans should pay in taxes are subjective and are, therefore, normative. Prediction on the price of German chocolate cake or a comment on how minimum wage influences the price of goods and services are both objective. These are positive statements.

Suppose that the table shows combinations of bicycles and tents that the economy of Outdoorland can produce using all of its resources and technology.

10 The opportunity cost of the second bicycle is _____ tents. (Note: Enter your answer as a numeral.)

(Scenario: The United States and Germany) Use Scenario: The United States and Germany. If Germany produces 300 tons of aluminum, how many tons of barley can it produce? Scenario: The United States and Germany Two countries, the United States and Germany, produce two goods, barley (B) and aluminum (A). Each has a linear production possibility frontier in both goods. If the United States spends all of its available resources to produce barley, it can produce 500 tons of barley and no aluminum. If it uses all of its resources to produce aluminum, it can produce 250 tons of aluminum and no barley. If Germany spends all of its available resources producing barley, it can produce 400 tons of barley, and if it spends all of its resources on the production of aluminum, it can produce 400 tons of aluminum.

100

A farmer produces both beans and corn on her farm. If she must give up 16 bushels of corn to be able to get 6 bushels of beans, then her opportunity cost of 1 bushel of beans is

2.67 bushels of corn each bushel of beans has an opportunity cost of 16/6 or 2.67 bushels of corn.

The accompanying graph contains the production possibilities frontier (PPF) for Rubberland. Rubberland only makes two products, rubber band balls and rubber hoses, and on a given day can produce according to the PPF in the graph. Point A on the PPF represents the combination of the two goods Rubberland currently produces. When a new method of rubber processing is discovered, the productivity of all Rubberland's inputs increases. Please shift the PPF to show this change. Assume that Rubberland does not make more rubber band balls than they originally made at point A but still maximize their productive capabilities. Move point A to their new production point. How many more rubber hoses do they now produce per day than before?

20 more hoses per day (have to move graph too) When economic growth occurs, the PPF shifts outward because the society can now produce more with the same inputs as before. In this society, at what used to be a production point of 80 rubber band balls and 50 hoses, Rubberland can now produce 80 rubber band balls and 70 hoses, or any other combination it may desire along the new PPF. Rubberland is now able to produce an additional 20 hoses, if it does not change its production of rubber band balls.

(Table: Production Possibilities Schedule I) Use Table: Production Possibilities Schedule I. If the economy produces two planes per period, it can also produce, at most, _____ trains per period.

24

Suppose that in an hour Monk can gather 9 pounds of fruit or 3 pounds of nuts. The opportunity cost of a pound of nuts for Monk is _____ pounds of fruit. (Note: Enter your answer as a numeral.)

3 9/3 = 3

(Table: Production Possibilities Schedule II) Use Table: Production Possibilities Schedule II. If an economy is producing at point C, the opportunity cost to it of producing at D is _____ cell phones per period. Table: Production Possibilities Schedule II

6

(Figure: Speedboats and Pomegranates I) Use Figure: Speedboats and Pomegranates I. The figure shows the production possibility frontiers for two countries that produce only pomegranates and speedboats. The axes of the two graphs are measured in equivalent units. The United States is operating at point M, and Belarus is operating at point N. The opportunity cost of producing an additional ton of pomegranates would be greater in:

Belarus.

Christine and Paul are deciding how to split their time between writing music and lyrics for their new album. Their PPFs for 72 h of work are shown. Christine and Paul have to write music for 8 songs and lyrics for 12 songs (4 songs already have music). When they are done, they can go to a private island and relax from all their hard work. It is possible that they will use more than 72 h. Once they start writing lyrics and music, assuming their hired help packs for them and their plane is waiting outside their door, in how many hours can they board the plane to their relaxing island getaway?

Hours: 96 Christine will write music for 0 songs Paul will write music for 8 songs Christine will write lyrics for 12 songs Paul will write lyrics for 0 songs When Christine does all of the work, it will take 72 h to write the music for 8 songs and 96 h (129×72 h=12×8 h129×72 h=12×8 h) to write the lyrics, for a total of 168 h. It would take Paul 72 h×86=9672 h×86=96 h to write the music and 216 h (3×72 h3×72 h) to write the lyrics, for a total of 312 h. If each did half of each job, then it would take Christine 84 h to write the music for 4 songs and the lyrics for 6 songs. It would take Paul 156 h to write the music for 4 songs and the lyrics for 6 songs. They would then work a total of 84 h+156 h=240 h84 h+156 h=240 h. The principle of comparative advantage tells us that even though Paul is worse than Christine at both tasks, they can both benefit from specializing and trading. In this case, they will save time by specializing so they can go to the island sooner. To determine who should specialize in what output, first determine Paul's and Christine's opportunity costs. Christine's opportunity cost of writing music for a song is lyrics for 9 songs writtenmusic for 8 songs written=lyrics written for 98 songsmusic for 1 song written=98lyrics for 9 songs writtenmusic for 8 songs written=lyrics written for 98 songsmusic for 1 song written=98 Paul's opportunity cost of writing music for a song is lyrics written for 4 songsmusic written for 6 songs=lyrics written for 46 songsmusic for 1 song written=46lyrics written for 4 songsmusic written for 6 songs=lyrics written for 46 songsmusic for 1 song written=46 Paul has a comparative advantage in writing music because of a lower opportunity cost (46(or 0.667)<98(or 1.125))(46(or 0.667)<98(or 1.125)). Since the opportunity cost of writing lyrics is the inverse of the opportunity cost of writing music, Christine has a comparative advantage in lyrics writing (89(or 0.889)<64(or 1.5))(89(or 0.889)<64(or 1.5)). Christine and Paul can complete the tasks in the shortest time if Christine writes the lyrics and Paul writes the music. It will take them 96 h to finish. Hence, if they can work at the same time, they can leave for the island sooner.

If Japan can produce 3 rice cakes or 6 seaweed salads in an hour, while Indonesia can produce 2 rice cakes or 5 seaweed salads in an hour, which of the following is true?

Indonesia has a comparative advantage in producing seaweed salads. In Japan , the opportunity cost of producing 1 rice cake is 2 seaweed salads (i.e. 6/3 = 2) and in Indonesia, the opportunity cost of producing 1 rice cake is 2.5 seaweed salads (i.e. 5/2 = 2.5)

Sally can type 100 words per minute while David can type 200 words per minute. Given these numbers, society would be better off if which one of the two was employed as a typist?

It depends. David types 100 wpm faster than Sally. But what if Sally had a broken arm at the time of the comparison. What if it wasn't a comparable timed test. What if Sally was answering emails and phones at the same time.

It takes Juan 1 hour to wash a car and 2 hours to wax it. Maria, on the other hand, takes 1 hour to wash a car and half an hour to wax it. If they divide the work, _______ would specialize in washing since his/her opportunity cost is _________ for that activity.

Juan; lowest Juan should specialize in washing because his opportunity cost to wash a car is being able to wax 0.5 car, while Maria's opportunity cost to wash a car is being able to wax 2 cars.

These figures illustrate the production possibilities available to Kate and Sarah with eight hours of labor in their bakery. Answer the questions according to these figures.

Kate has an absolute advantage in: neither good. Sarah has an absolute advantage in: both goods.

Which statement is a positive statement?

Lowering the tax rate will increase consumer spending.

The circular-flow diagram ignores a number of real-world complications in the interest of simplicity. Which of the following factors is ignored?

That many sales that firms make are not to households but to other firms.

Label each component of the circular flow diagram.

The circular flow model shows how firms and households interact with each other in two markets: markets for goods and services, and markets for factors of production, or factor markets. In markets for goods and services, firms are sellers and households are buyers. Goods and services flow from firms to households. Money spent on goods and services flows from households to firms. The buyer and seller roles are reversed in markets for factors of production, where firms purchase inputs from households. Flowing from households to firms are all of the things that businesses need for production, called factors, in exchange for money in the form of wages, interest, or rent.

Having a comparative advantage in producing a good means that:

a country can produce the good at a lower opportunity cost than other countries. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality.

(Table: Production Possibilities Schedule II) Use Table: Production Possibilities Schedule II. If an economy is producing at point C, the opportunity cost to it of producing at D is _____ cell phones per period. Table: Production Possibilities Schedule II

The percentage of Pennsylvania residents with a university degree rises from 15% to 23%.

If an economy moves from a point on a production possibility frontier line to a point to the right of that production possibility frontier, what event might have occurred?

There has been a discovery of new technology that expands production possibilities. New technologies can produce greater production using the same amount of labor

Saying that an unemployment rate of 8% is too high is:

a normative statement.

Why is the shape of the production possibilities frontier (PPF) often curved instead of straight?

Typically, some resources are better suited for producing one good than another, which means that there are diminishing returns when moving such resources away from producing what they are best suited for. This is an example of the law of diminishing returns, which predicts that as additional resources are used to produce a good, the marginal benefit will decrease. The first few resources that an economy devotes to a good will see large increases in productivity, but once most resources are allocated towards it, allocating the last few resources available towards that good will squeeze out only a smaller addition in productivity. The slope of the PPF changes as the productivity of resources devoted to each good change, thus leading to a bowed PPF. In regards to the other choices, productive efficiency is the same anywhere along the PPF and would not be a reason why the PPF is curved. The PPF describes society as a whole, but does not explain the curvature of the PPF. Lastly, a sunk cost is a cost that cannot be recovered. This response is not relevant here.

Can a production possibility frontier ever shrink inwards?

Yes, if new regulations restrict a country's capacity to produce goods. If resources are declining, a lack of laborors, or regulations restricing the amount of goods produced will result in the frontier shrinking inwards.

Suppose you have a very efficient study system. Then, as you increase the hours that you study for an economics exam, the opportunity cost of studying for the exam:(Please explain your answer) a) increases. b) decreases. c) stays the same. d) may increase or decrease.

a) increases. The opportunity cost increases because of giving more time to study but I have less time to do other things.

The table presents information about the productivity of digital cameras and personal computers in the United States and Japan. The data are presented in units of output per hour of work. Use this information to answer the question. Japan has a(n) ___________________ advantage in producing ______________________

absolute, personal computers Japan has an absolute advantage in the production of personal computers, because it could produce 3 computers per hour, while the United States could only produce 2. On the other hand, the United States has an absolute advantage in the production of digital cameras, because it could produce 8 cameras per hour, while Japan could only produce 6. Japan can produce 6 cameras if it spends all of its time and resources on cameras. It can, alternatively, produce 3 personal computers if it spends all of its time and resources on producing personal computers. As a result, for producing 3 personal computers, they have to give up producing 6 digital cameras. Hence, each personal computer would have an opportunity cost of 6/3 or 2 digital cameras. At the same time, each digital camera would have an opportunity cost of 3/6 or 0.5 personal computers. The United States can produce 8 digital cameras if it spends all of its time and resources on producing digital cameras. It can, alternatively, produce 2 personal computers if it spends all of its time and resources on producing personal computers. As a result, for producing 2 personal computers, it has to give up producing 8 digital cameras. Hence, each personal computer would have an opportunity cost of 8/2 or 4 digital cameras. At the same time, each digital camera would have an opportunity cost of 2/8 or 0.25 personal computers. Comparing the opportunity costs, Japan has a comparative advantage in the production of personal computers, because it has a lower opportunity cost in producing personal computers (2 digital cameras < 4 digital cameras). The United States has a comparative advantage in the production of digital cameras, because it has a lower opportunity cost in producing digital cameras (0.25 personal computers < 0.5 personal computers).

Identify each statement as true or false. a. When two countries choose to partake in international trade, it is a mutually beneficial activity for both countries. b. Wealthier countries always benefit more from international trade than poorer countries. c. Countries trade for goods in which they do not have a comparative advantage, and therefore, would never trade with nations that have similar resource endowments. c. Countries trade for goods in which they do not have a comparative advantage, and therefore, would never trade with nations that have similar resource endowments. d. Through specialization and trade, it is possible for a country to consume a combination of goods that is beyondits original production possibilities frontier.

a) true b) false c) false d) true When countries choose to partake in international trade, it is a mutually beneficial activity for both countries, because it allows all participating countries to consume more than is possible under autarky. This occurs because, with specialization, countries produce goods that they are relatively good at making. With both trading partners specializing in the areas of their relative strengths and trading for items in the areas of their relative weaknesses, joint production increases. Besides, if it were not mutually beneficial, they would not choose to partake in trading. In the context of the production possibilities frontier (PPF), it is possible that trade will allow for the consumption of points beyond the original PPF because they are no longer solely dependent on their own resources. As stated previously, if countries partake in trade, it is mutually beneficial for all parties involved, whether they are poorer or wealthier. The issue of who benefits more is controversial and there are many issues to consider, such as whether one country - typically a wealthier country - is taking advantage of another country - typically a poorer country - by exploiting its resources. Consequently, it is difficult to define who is doing better, but it is true that some countries depend on trade more than others. Although comparative advantage explains many instances of international trade, there is evidence of countries with similar resource endowments engaging in trade with one another. When occurring in the same industry, this is called intra-industry trade and is often a result of economies of scale.

Suppose that Paulie and Vinny each can produce ice cream or t-shirts. The table shows the quantity of each good that Paulie and Vinny each can produce in 11 hour, respectively, if they devote all of their time and effort into making the good. Round all answers to two decimal places. a. What is Paulie's opportunity cost of producing a cup of ice cream? b. What is Vinny's opportunity cost of producing a t-shirt? c. Paulie has a comparative advantage in_________________ and Vinny has a comparative advantage in__________________

a. Paulie's opportunity cost: 8 t-shirt b. Vinny's opportunity cost: .11 cup of ice cream C. P = T-shirts & V = Ice Cream Opportunity cost is a measure of what must be given up when undertaking an action. Paulie's opportunity cost of making a cup of ice cream is the number of t-shirts that he could have produced instead in the time it takes to make 11 t-shirt. Paulie can make either 16.0016.00 t-shirts or 2.002.00 cups of ice cream. His opportunity cost of 11 cup of ice cream is, therefore, 16.00/2.0016.00/2.00 or 8.008.00 t-shirts. Using the same process, Vinny's opportunity cost of a t-shirt is 7.00/12.007.00/12.00 or 0.580.58 cups of ice cream. A person, firm, or nation has a comparative advantage if they can produce a good at a lower opportunity cost than another person, firm, or nation. For ice cream, Paulie's opportunity cost is 16.00/2.0016.00/2.00 or 8.008.00, while Vinny's opportunity cost is 12.00/7.0012.00/7.00 or 1.711.71. Vinny has the comparative advantage in ice cream because his opportunity cost is lower. For t-shirts, Paulie's opportunity cost is 2.00/16.002.00/16.00 or 0.130.13, while Vinny's opportunity cost is 7.00/12.007.00/12.00 or 0.580.58. Paulie has the comparative advantage in t-shirts because his opportunity cost is lower.

Classify the statements as true or false. a. The process of specialization and trade has positive net benefits and is, therefore, beneficial to everyone. b. A nation will not have a comparative advantage in a product if it does not also have an absolute advantage in the production of that good. c. It can be mutually beneficial for two nations to specialize in goods for which they have a comparative advantage and then trade with one another. d. Countries specialize in the production of goods for which they have a comparative advantage. e. Absolute advantage is the source of the potential gains from specialization and trade.

a. false b. false c. true d. true e. false There are two true statements. Nations specialize in products that they are relatively good at making, i.e., goods for which they have a comparative advantage. When both trading partners specialize and then trade with each other, the total amount of output is higher than the amount that is produced in autarky. Both nations can consume more than they can produce and are, therefore, better off as a result of trade. The remaining three statements are false. Comparative advantage, rather than absolute advantage, is the source of the potential gains from trade. A nation can have a comparative advantage in at least one product, even when it does not have an absolute advantage in any product. Specialization allows nations to consume more than they can produce on their own and is thought to have positive net benefits. Some people can lose, however, which implies that not everyone is better off with trade. For example, individuals employed within an industry in which a country does not have the comparative advantage may end up losing their jobs. This job loss will generally be more than offset by productivity gains and jobs created in other industries, but other people are more likely to be the beneficiaries of those gains. So, although trade is generally beneficial for the economy as a whole, it can create winners and losers within the economy.

Chang and Roberto created economic models using different simplifying assumptions. Chang and Roberto will likely:

arrive at differing conclusions.

Odell and Stephany created economic models to examine the impact of a new tax policy on the economy. When they created their respective economic models, they used different assumptions to simplify the economy. Odell and Stephany will likely:

arrive at differing conclusions.

When an economic model is used, it tends to: a) start with many details and then become simpler over time. b) include many caveats to ensure that the model is realistic. c) start with very few details in order to simplify the model. d) use a case study approach by focusing on one specific real-life example.

c) start with very few details in order to simplify the model. An economist avoids using too many variables in order to avoid complexity includes a lot of assumptions which make the models realistic.

If Switzerland can produce more watches in a year than Austria, we know that Switzerland:

definitely has an absolute advantage in producing watches. The absolute advantage compares the production and higher production country have the absolute advantage so Switzerland has absolute advantage.

A country that does not have an absolute advantage in the production of any good or service:

can benefit from trade by specializing in goods in which it has a comparative advantage. The country would have a comparative advantage to produce a good or service at a lower opportunity cost than others

(Figure: Dreamliners and Small Jets) Use Figure: Dreamliners and Small Jets. On this figure, points A, B, E, and F indicate:

combinations of dreamliners and small jets that society can produce, using all of its factors efficiently.

Suppose you are trying to understand the effect that an increase in the price of grapes will have on the market for wine. An effective model to determine this effect is one that evaluates the change in the price of grapes on the market quantity of wine assuming: a) buyers' incomes also change. b) buyers' preferences and incomes also change. c) some wines use different grapes. d) no other change takes place.

d) no other change takes place.

An economic model:

is a simplified version of reality used to understand real-world economic conditions.

Trade can be beneficial to an economy because:

it enables more goods and services to be obtained at a lower opportunity cost.

(Table: Matcha Tea and Coho Salmon Production Possibilities II) Use Table: Matcha Tea and Coho Salmon Production Possibilities II. This table shows the maximum amounts of matcha tea and Coho salmon, both measured in pounds, that Colombia and Washington can produce if each produces just one good. Colombia has a comparative advantage in the production of:

matcha tea only.

(Figure: Production Possibilities and Circular-Flow Diagram) Use Figure: Production Possibilities and Circular-Flow Diagram. Assume the two figures represent the same economy. Suppose that in the circular-flow diagram, capital that used to flow to firms producing bananas now flows to firms producing pineapple. This adjustment would be BEST represented in the production possibilities diagram by a move from point A toward:

point B (a decrease in banana production and an increase in pineapple production).

(Scenario: The United States and Germany) Use Scenario: The United States and Germany. Given this information, the country that has the absolute advantage in barley is _____, and the country that has the absolute advantage in aluminum is _____. Scenario: The United States and Germany Two countries, the United States and Germany, produce two goods, barley (B) and aluminum (A). Each has a linear production possibility frontier in both goods. If the United States spends all of its available resources to produce barley, it can produce 500 tons of barley and no aluminum. If it uses all of its resources to produce aluminum, it can produce 250 tons of aluminum and no barley. If Germany spends all of its available resources producing barley, it can produce 400 tons of barley, and if it spends all of its resources on the production of aluminum, it can produce 400 tons of aluminum.

the United States; Germany

(Figure: Apple Cider and Soybeans) Use Figure: Apple Cider and Soybeans. If this economy is producing at point A and wants to produce at point B, it must:

use its existing resources more efficiently, as opportunity costs are zero.

A normative statement is a statement regarding:

what should be.