Chapter 2: Confronting Scarcity: Choices in Production

marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quo

labor

the human effort that can be applied to the production of goods and services

Utility

satisfaction, usefulness, or value one obtains from consuming goods and services

production possibilities curve

A graphical representation of the alternative combinations of goods and services an economy can produce.

Entrepreneur

A person who, operating within the context of a market economy, seeks to earns profits by finding new ways to organize factors of production.

Using the same amount of time and resources, Tomer can either write 100 lines of code or process 20 reports, and Charlotte can either write 120 lines of code or process 20 reports. Which of these trading prices will Charlotte and Tomer agree on if they specialize and trade? A. 1 line of code trades for 0.18 of a report B. 1 lines of code trades for .25 of a report C. 1 lines of code trades for .5 of a report D. 1 lines of code trades for .1 of a report E. 1 lines of code trades for .05 of a report

A. 1 line of code trades for 0.18 of a report Explanation: An agreeable price for a good always falls between the two agents' opportunity cost for that good. Charlotte's opportunity cost of a line of code is 1/6, or 0.167, of a report and Tomer's opportunity cost of a line of code is 0.2 reports. Charlotte should specialize in lines of codes and will be willing to sell them for anything more than .167 of a report, and Tomer will be willing to buy them for anything less than .2 reports.

Two agents with identical resources can each make the same two goods: baseball trophies and racing medals. Which of the following best captures the idea of absolute advantage for these two agents? A. One agent is able to sell its goods at for a higher price than the other. B. An agent is able to produce more of a good or service than another economic agent given the same resources. C. Both agents have identical opportunity costs. D. One agent has higher opportunity costs of one good, and the other agent has higher opportunity costs of the other good. E. One economic agent has a lower opportunity cost of one good, and another economic agent has a lower opportunity cost of a different good.

B. An agent is able to produce more of a good or service than another economic agent given the same resources. explanation: An agent has an absolute advantage in a good's production when it can produce the good more efficiently or in a higher quantity with a certain amount of resources than another individual or nation.

What are the elements of property rights that help markets function? A. rivalry and non-excludability B. exclusivity, enforceability, and transferability C. central planning of resource use, central planning of allocation of goods, centrally set prices D. non-rivalry and non-excludability E. durability, portability, divisibility

B. exclusivity, enforceability, and transferability

The table below shows the production possibilities of Country X for two goods. Apples (tons): Wool (bales): 500 0 400 4,000 300 8,000 200 12,000 100 16,000 0 20,000 What is the opportunity cost of bale of wool in Country X? A. 250 tons of apples B. 4,000 tons of apples C. 0.025 tons of apples D. 100 tons of apples E. 40 tons of apples

C. 0.025 tons of apples

Which of the following is an accurate representation of economic growth? A. An increase in capital available without any increase in production B. An increase in human resources that aren't used C. An increase in both the potential and actual level of output of goods and services over time D. An increase in the amount of money circulating in the economy E. Any increase in output of goods or services when an economy starts at a point inside its PPC

C. An increase in both the potential and actual level of output of goods and services over time

How are resources more likely to be allocated in a command economy? A. Elections B. Markets C. Government Planning D. A price system E. Based on Tradition

C. Government Planning

Which of the following best describes the difference between microeconomics and macroeconomics? A. Microeconomics is about normative analysis; Macroeconomics is about positive analysis B. Microeconomics is about efficiency; Macroeconomics is about equity C. Microeconomics is about individuals, households, and firms; Macroeconomics is about economies as a whole D. Microeconomics is about how much total output there is in an economy; Macroeconomics is about how much individual firms produce. E. Microeconomics is about markets for financial assets; Macroeconomics is about markets for the factors of production

C. Microeconomics is about individuals, households, and firms; Macroeconomics is about economies as a whole

Which of the following best captures the three economic questions every economic system must answer? A. How much, how often, and for whom? B. What, when, and why? C. What, how, and for whom? D. What, how, and when? E. When, where, and why?

C. What, how, and for whom?

Using the same amount of time and resources, Tomer can either write 100 lines of code or process 20 reports, and Charlotte can either write 120 lines of code or process 20 reports. If Charlotte and Tomer specialize and trade, who should produce which good?

Charlotte should specialize in writing lines of code, Tomer should specialize in reports explanation: Each agent should specialize in what producing the good they have a comparative advantage at producing. Charlotte has a comparative advantage in writing lines of code and Tomer has a comparative advantage in reports.

Which of the following statements about specialization and trade is true? A. A country should specialize in and export the good for which it has absolute advantage. B. A country should specialize in and import the good for which it has comparative advantage. C. A country should specialize in and import the good for which it has absolute advantage. D. A country should specialize in and export the good for which it has a comparative advantage.

D. A country should specialize in and export the good for which it has a comparative advantage. explanation: If a country has comparative advantage in a good, it should produce more of that good and export it. The country should import the other good from a country that has comparative advantage in that good.

Which of the following best captures the idea of the fundamental economic problem? A. Limited wants and limited resources B. Unlimited resources and unlimited wants C. Lack of demand for limited resources D. Infinite resources and limited wants E. Limited resources and unlimited wants

E. Limited resources and unlimited wants

Which of the following would NOT be part of the opportunity costs of going to college? A. The money spent on tuition B. Interest payments on student loans C. Money spent on textbooks D. Foregone wages given up to attend college E. Money spent on clothes

E. Money Spent on clothes

command socialist economy

Economy in which government is the primary owner of capital and natural resources and has broad power to allocate the use of factors of production.

Labor laws, elections, and bank regulations are all examples of ________ forces that affect businesses.

Political

full employment

Situation in which all the factors of production that are available for use under current market conditions are being utilized.

Specialization

Situation in which an economy is producing the goods and services in which it has a comparative advantage.

absolute advantage

Situation in which an economy or individual can produce more of any good per unit of labor than another country or individual.

Technology

The knowledge that can be applied to the production of goods and services.

economic growth

The process through which an economy achieves an outward shift in its production possibilities curve.

terms of trade

The rate at which a country can trade domestic products for imported products.

factors of production

The resources available to the economy for the production of goods and services

Natural Rescources

The resources of nature that can be used for the production of goods and services.

efficient production

When an economy is operating on its production possibilities curve.

Production Possibilities Frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available

What is the best definition of a stock? a. The image of the business in the media b. A share of a business that can be bought and sold c. A loan to cover unexpected expenses

a share of a business that can be bought and sold

opportunity set

all possible combinations of consumption that someone can afford given the prices of goods and the individual's income

budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set

law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units

Claude prefers to conduct business in Asian countries with lower taxation rates rather than European countries with higher taxation rates because he feels that he can make a greater profit. What type of force is this an example of? a. Social b. Technological c. Economic

c. Economic

How do wars, epidemics of disease, and changes in the environment affect global business? a. They lead to worldwide panic. b. They increase government security. c. They undermine national stability.

c. They undermine national stability.

normative statement

statement which describes how the world should be

positive statement

statement which describes the world as it is

Human capital

the skills a worker has as a result of education, training, or experience that can be used in production

product efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

allocative efficiency

when the mix of goods being produced represents the mix that society most desires

Which of the following demonstrates non-rivalry in consumption? A. Information B. Oil C. Income D. Equipment E. Workers

A. Information

law of increasing opportunity cost

As an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase.

Using the same amount of time and resources, Kim can write either 10 articles or complete 5 worksheets and Leah can either write 3 articles or complete 9 worksheets. Who has a comparative advantage in each thing? A. Nobody has a comparative advantage in either good. B. Leah has a comparative advantage in both goods. C. Kim has a comparative advantage in both goods. D. Kim has a comparative advantage in worksheets; Leah has a comparative advantage in writing articles. E. Kim has a comparative advantage in writing articles, Leah has a comparative advantage in worksheets.

Kim has a comparative advantage in writing articles, Leah has a comparative advantage in worksheets. explanation: Whoever has a lower opportunity cost has a comparative advantage in producing that good. Kim's opportunity cost of an article is ½ of a worksheet and Leah's opportunity cost of an article is 3 worksheets, so Kim has a comparative advantage in articles. Kim's opportunity cost of a worksheet is 2 articles and Leah's opportunity cost of a worksheet is ⅓ of an article, so Leah has a comparative advantage in worksheets.

Which of these companies would be considered a competitor to a plumbing business? a. A contractor that buys up large quantities of plumbing fixtures, leaving suppliers depleted b. A plumbing company that pays workers less in order to offer rock-bottom prices c. A manufacturing company that supplies plumbing parts d. A plumbing company that offers higher wages and better hours to its employees

a. A contractor that buys up large quantities of plumbing fixtures, leaving suppliers depleted b. A plumbing company that pays workers less in order to offer rock-bottom prices d. A plumbing company that offers higher wages and better hours to its employees

What are examples of global forces that might affect businesses? a. A rise in the population of one ethnic group in a large US city b. A drop in the value of the US dollar c. An international trade agreement among Asian countries

b. A drop in the value of the US dollar c. An international trade agreement among Asian countries

How does fiscal policy affect businesses? a. By raising interest rates b. By influencing the business cycle c. By shrinking the money supply

b. By influencing the business cycle

The signing of the US-Japan Security Treaty marked a joint agreement to combat cyberattacks, which promised help make businesses in both countries more secure. What type of force does the treaty represent? a. Political b. Global c. Social forces

b. Global

What is the term for the increasing interconnectedness of economies around the world? a. Socialism b. Globalization c. Nationalization

b. Globalization

When the economy is experiencing inflation, what happens to businesses' purchasing power? a. It increases. b. It decreases. c. It remains unchanged.

b. It decreases

What are global forces that impact businesses around the world? a. Retirement of corporate executives b. Trade agreements c. Fluctuations in currency exchange rates d. Military alliances

b. Trade agreements c. Fluctuations in currency exchange rates d. Military alliances

Which of these are types of stakeholders that businesses must recognize and satisfy? a. competitors b. owners c. employees d. lenders

b. owners c. employees d. lenders

sunk costs

costs that have already been incurred and cannot be recovered

invisible hand

idea that self-interested behavior by individuals can lead to positive social outcomes

capital

A factor of production that has been produced for use in the production of other goods and services.

Which of the following is NOT true of a pure command economy? A. Prices serve as signals to allocate resources B. Allocation decisions are centrally coordinated C. Production decisions are centrally coordinated D. Capital and labor are allocated based on a centralized plan E. The factors of production are collectively owned

A. Prices serve as signals to allocate resources

Which of the following situations would allow agents to gain from specialization and trade with one another? A. The terms of trade are between the two agents' opportunity costs. B. The agents have the same opportunity costs. C. One agent has absolute advantage in both goods. D. One agent has comparative advantage in both goods. E. Either agent has absolute advantage in either of the goods.

A. The terms of trade are between the two agents' opportunity costs. explanation: If the terms of trade for a good is between one agent's opportunity cost for that good and the other agent's opportunity cost for that good, then both can benefit from trade.

Which of the following statements best describes opportunity costs?A. The value of things given up when a decision is made. B. The cost a buyer sees for something they want C. The monetary cost of any economic transaction D. The tradeoffs faced when choosing how to use a scarce resource E. The price to a consumer of a good or service

A. The value of things given up when a decision is made.

Which of the following concepts can be modeled using a PPC? A. When all resources are being used, making more of one good means making less of the other good. B. A society can produce more of any good just by reallocating its resources more efficiently C. Prices that the goods will sell for will be determined in a market D. Societies have preferences about what should be produced E. Governments, rather than markets, are more efficient allocators of resources

A. When all resources are being used, making more of one good means making less of the other good.

When a government decides only people who have paid an annual fee will get certain services, such as firefighting services, which of the three economic questions does it answer? A. Who should get the goods produced? B. Is it fair to deny services? C. How should it be produced? D. What should be produced? E. Is this a good way to allocate services?

A. Who should get the goods produced?

Tomer and Charlotte have the same resources and time. Tomer can either write 100 lines of code or process 20 reports, and Charlotte can either write 120 lines of code or process 20 reports. Who has an absolute advantage in each thing? A. Tomer has an absolute advantage in both goods. B. Charlotte has an absolute advantage in writing lines of code; nobody has an absolute advantage in processing reports. C. Charlotte has an absolute advantage in writing code and Tomer has an absolute advantage in processing reports. D. Charlotte has an absolute advantage in both goods. E. Charlotte has an absolute advantage in writing code; both people have an absolute advantage in processing reports.

B. Charlotte has an absolute advantage in writing lines of code; nobody has an absolute advantage in processing reports. Explanation: Tomer: 100 lines of code or 20 reports 100/20 = 5; 20/20 = 1 Charlotte = 120 lines of code or 20 reports 120/20 = 6; 20/20 = 1 So charlotte can produce the most lines of code but they can both only process the same amounts of reports.

Which of the following would best be described as a positive statement? A. Free markets are inherently unfair institutions B. Countries normally experience higher unemployment during recessions C. Business profits should be redistributed through taxes to benefit more of society D. Increasing taxes is positively wrong E. The focus of government spending should be on improving wellbeing

B. Countries normally experience higher unemployment during recessions

Which of the following is NOT a likely consequence of weakly established or absent property rights? A. prices that do not reflect the true value and cost of something B. Innovation C. overuse of a resource D. uncertainty about ownership claims E. pollution

B. Innovation

Which of the following is NOT an economic resource? A. Labor B. Money C. Land D. Capital E. Water

B. Money

Which of the following best describes what we mean by resources in economics? A. Natural resources like natural gas and trees B. The factors used to produce goods and services C. Human resources like workers D. The ability to handle a situation E. Monetary wealth

B. The factors used to produce goods and services

A government has decided cheese sandwiches must only be eaten by eight-year-old children from this day forward, and each child must be given four cheese sandwiches per week. Which of the three basic economic questions is the government answering? A. How should it be produced? B. Who consumes goods and services? C. Who should produce goods and services? D. What should be produced? E. When should we produce it?

B. Who consumes goods and services?

Which of the following are features of a market economy but not a command economy? A. Prices are set by a central authority. B. Decisions about how production is allocated to households are determined by a central authority. C. Buyers and sellers rely on prices created in markets to provide information about the relative value of goods, services, and resources. D. Decisions about what is produced are determined by a central authority. E. Resources are allocated by a central authority.

C. Buyers and sellers rely on prices created in markets to provide information about the relative value of goods, services, and resources.

Eric and Melanie like to build apps and coach soccer. The time it takes Eric and Melanie to build apps and plan soccer drills for their team is given in the table below. Time to build an app: Eric: 20 hours; Melanie: 20 hours Time to write a soccer drill: Eric: 5 hours; Melanie: 10 hours Which person has a comparative advantage in the production of apps, and which person has a comparative advantage in the production of soccer drills? A. Neither person has a comparative advantage at producing either good. B. Melanie has a comparative advantage in creating soccer drills; Eric has a comparative advantage in building apps. C. Melanie has a comparative advantage in building apps; Eric has a comparative advantage in creating soccer drills. D. Eric has a comparative advantage in building apps; nobody has a comparative advantage in planning soccer drills. E. Both people have a comparative advantage in producing both goods.

C. Melanie has a comparative advantage in building apps; Eric has a comparative advantage in creating soccer drills. explanation: It costs Eric 4 (20/5) soccer drills worth of time to build an app, but it only costs Melanie 2 (20/10) soccer drills worth of time to build an app. Therefore, Melanie has a comparative advantage to build an app. Simply, it costs Eric 1/4 (5/20) of an app's worth of time to create a soccer drill, but it costs Melanie 1/2 (10/20) of an app's worth of time. Therefore, Eric has the comparative advantage when creating soccer drills.

Alex and Ella are completing a project for class together that requires them to complete worksheets and write essays, and they are trying to decide how to best use their time to divide and conquer this assignment. The input table below gives the time that it takes Ella and Alex to complete their homework assignments in hours. Time to complete worksheets: Ella: 1 hour Alex: 1 hour Time to complete essays: Ella: 2 hours Alex: 3 hours Who has the absolute advantage in each good? A. Alex has absolute advantage in essays and Ella has absolute advantage in worksheets B. Ella has absolute advantage in essays and Alex has absolute advantage in worksheets C. Both have absolute advantage in both goods. D. Ella has absolute advantage in essays, but neither has absolute advantage in worksheets E. Alex has absolute advantage in essays, but neither has absolute advantage in worksheets

D. Ella has absolute advantage in essays, but neither has absolute advantage in worksheets Ella does have absolute advantage in essays because she takes less time to produce them than Alex, but neither has absolute advantage in worksheets since they both take the same time to complete them.

Which of the following is necessary for a market economy to function well, but is not necessary for a command economy to function well? A. Centralized decision-making about the allocation of goods and services B. Scarcity C. Centralized decision-making about resource allocation D. Well-defined and well-protected property rights E. Government rationing

D. Well-defined and well-protected property rights

Using the same amount of time and resources, Aanand can either build 6 models or prepare 4 experiments, and Pam can either build 9 models or prepare 6 experiments. Who has a comparative advantage in building models and who has a comparative advantage in preparing experiments? A. Aanand has a comparative advantage in building models and Pam has a comparative advantage in preparing experiments. B. Both have a comparative advantage in both goods. C. Pam has a comparative advantage in both building models and preparing experiments. D. Pam has a comparative advantage in building models; both people have a comparative advantage in preparing experiments. E. Neither has a comparative advantage in producing either good.

E. Neither has a comparative advantage in producing either good. explanation: Aanand: 6 models or 4 experiments 6/4 = 3/2; 4/4 = 1 Pam: 9 models or 6 experiments 9/6 = 3/2; 6/6 = 1 So either has a comparative advantage because they can both produce the same amount

Using the same amount of time and resources, Aanand can either build 6 models or prepare 4 experiments, and Pam can either build 9 models or prepare 6 experiments. Who should specialize in the production of which good? A. Aanand should specialize in models and Pam should specialize in experiments. B. Aanand should specialize in models but nobody should specialize in processing experiments. C. Pam should specialize in models and Aanand should specialize in experiments. D. Pam should specialize in both goods E. There is no opportunity for gains from trade because neither person has a comparative advantage in producing either good.

E. There is no opportunity for gains from trade because neither person has a comparative advantage in producing either good. explanation: Aanand and Pam have identical opportunity costs, and therefore nobody has a comparative advantage at producing either good. Without comparative advantage there is no opportunity to benefit from specialization and trade.

Which of the following is an example of a microeconomic question? A. Who are the winners and losers from the imposition of a tax on cigarettes? B. Which is the optimal number of workers for an ice cream shop to employ during the summer months? C. How many smart phones should Samsung produce this quarter? D. How will a consumer react if their income decreases? E. What would be the likely impact of an increase in business taxes on the overall level of inflation in the country?

E. What would be the likely impact of an increase in business taxes on the overall level of inflation in the country?

Market capitalist economy

Economy in which resources are generally owned by private individuals who have the power to make decisions about their use.

mixed economies

Economy that combine elements of market capitalist and of command socialist economic systems.

comparative advantage

In producing a good or service, the situation that occurs if the opportunity cost of producing that good or service is lower for that of economy than for any other.

financial capital

Includes money and other "paper" assets (such as stocks and bonds) that represent claims on future payments.

How do high tax rates affect businesses? a. They reduce the amount of profit retained by businesses. b. They improve businesses' ability to provide goods and services. c. They have little to no impact on businesses. d. They restrict the amount of money that companies can invest in initiatives.

a. They reduce the amount of profit retained by businesses. d. They restrict the amount of money that companies can invest in initiatives.

Joya can make an apple pie in 20 minutes and she can prepare a turkey in 60 minutes. Chris needs 25 minutes to make a pie but requires 100 minutes to prepare a turkey. Based on this information, who should focus on making turkey for Thanksgiving dinner? A. Chris B. Joya C. Neither D. Both E. We cannot tell

Joya

inefficient production

Situation in which the economy is using the same quantities of factors of production but is operating inside its production possibilities curve.

Production possibilities model

The rules that define how an economy's resources are to be owned and how decisions about their use are to be made.

economic system

The set of rules that define how an economy's resources are to be owned and how decisions about their use are to be made.

utility

The value, or satisfaction, that people derive from the goods and services they consume and the activities they pursue.

What do contract enforcement laws most affect? a. Businesses' willingness to enter into relationships b. The rate of globalization c. Tax policy in industrialized nations

a. Businesses' willingness to enter into relationships

What is associated with restricting how much companies can invest in initiatives and how much profit is retained in the business? a. High tax rates on businesses b. Low tax rates on businesses c. No taxes levied on businesses

a. High tax rates on businesses

What is the impact on businesses when global forces increase national instability? a. International business becomes more risky. b. International trade ceases. c. Global systems become more stable.

a. International business becomes more risky.

Which of these are considered global forces on business? a. Military Alliances b. Environmental Regulations c. Sporting events d. Immigration policies

a. Military Alliances b. Environmental Regulations d. Immigration policies

What opponents of free trade say can be used to protect local businesses from low-cost foreign goods? a. Tariffs b. Globalization c. Competition

a. Tariffs

Which of these are examples of political forces that affect business? a. The election of a pro-business senator b. The passage of a new environmental regulation c. The emergence of a number of companies providing the same service

a. The election of a pro-business senator b. The passage of a new environmental regulation

What are characteristics of business competitors? a. They sell similar products or services. b. They have neighboring offices but different types of businesses. c. They are the distributors that sell the supplies needed to make a product. d. They need similar resources for their products or services

a. They sell similar products or services. d. They need similar resources for their products or services

The government influences the business cycle primarily by controlling ______. a. fiscal policy b. competitive advantage c. globalization

a. fiscal policy

law of diminishing returns

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline

Critical business stakeholders who loan funds to firms are known as

lenders

opportunity cost

measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative

What terms are used to describe those who own a share of a company?

shareholders and stockholders