Chapter 2

Does either country have an absolute advantage in producing?

Neither country has an absolute advantage in both goods because Canada can produce more boots and US can produce more shirts.

The production possibilities frontier will shift outward

if resources are used to produce capital goods.

Points B,C,D because this is where maximum output it produced with available resources.

Which point(s) are efficient? Briefly explain why.

Point A because production there is not using all available resources.

Which point(s) are inefficient? Briefly explain why.

Point X because it its outside the PPF.

Which point(s) are unattainable?

Point B because it is where the most resources are used to produce capital goods.

At which point is the country's future growth rate likely to be highest? Briefly explain why.

We can show economic inefficiency

with points inside the production possibilities frontier

We can show economic efficiency

with points on the production possibilities frontier

A production possibilities frontier (PPF)

(.A curve) shows the maximum attainable combinations of two goods that may be produced with available resources

Using the same amount of resources the united States and Canada can both produce lumberjack shirts and lumberjack boots. Knowing that US makes 4 boots =36 shirts and that Canada makes 36 boots = 6 shirts. Who has the comparative advantage in boots?

Canada

What does increasing marginal opportunity costs mean?

Increasing the production of a good requires larger and larger decreases in the production of another good.

Increasing marginal opportunity costs.

On the diagram to the right, movement along the curves from points A to B to C illustrates:

Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery equipment, and computers, are goods used to produce other goods. Is it likely that the PPF in this situation would be a straight line:

The PPF would be bowed out because not all resources are equally suited to produce both consumption and capital goods.

What is comparative advantage?

The ability to produce a good or service at a lower opportunity cost than other producers.

What is absolute advantage?

The ability to produce more of a good or service than competitors using the same amount of resources.

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.

Suppose you win free tickets to a movie plus all you can eat at the snack bar for free. Would there be a cost to you to attend this movie?

Yes, because the movie's opportunity cost is equal to the highest- valued alternative that must be given up to attend the movie.

What are the implications of this idea for shape of the production possibilities frontier?

The production possibilities frontier will be bowed outward.

Knowing that US makes 4 boots =36 shirts and that Canada makes 36 boots = 6 shirts. Who has the comparative advantage in shirts?

US

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.

It is possible for a country to have a comparative advantage in producing a good without also having 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.