ECON-2302 Inquizitive Ch. 2 - Model Building & Gains from Trade

In one day, Al's Furniture can make 3 tables or 4 chairs, whereas BIG Furniture Warehouse can make 20 tables or 30 chairs. Match the concept to the corresponding description.

BIG and Al's could both benefit if they coordinated their production efforts ~gain from trade [BIG and Al's could exchange tables and chairs and both come out ahead] BIG can make more tables than Al's ~absolute advantage [BIG has an absolute advantage in table production. They also have an absolute advantage in chair production] for BIG to make more tables, it has to make fewer chairs ~trade-off [the amount of trade-off involved in choosing to do one thing rather than another is the opportunity cost] Al's can make tables at a lower opportunity cost than BIG ~comparative advantage [Al's opportunity cost per table is 1.33 chairs, whereas for BIG it is 1.5 chairs] *[absolute advantage is about who can make more of a good in absolute numbers; comparative advantage is about how much a producer can make of one good compared with another]

In one month, Mikhail's Furnishings can make 160 carpets or 160 quilts, whereas Dominique's Parlor can make 120 carpets or 200 quilts. Currently, Mikhail's is making 80 carpets and 80 quilts per month whereas Dominique's is making 60 carpets and 100 quilts. If from now on Mikhail's starts making nothing but carpets and Dominique's makes nothing but quilts, and the two shops trade 90 quilts from Dominique's for 70 carpets from Mikhail's every month, what will be each shop's gain from trade? Answer the question by matching gains to shop.

Dominique's ~10 quilts ~10 carpets Mikhail's ~10 quilts ~10 carpets

In one year, Wynn Debbler can make 90 pairs of pants or 30 coats, whereas Peg Michaels can make 100 pairs of pants or 30 coats. They discuss an arrangement in which Peg gives Wynn pants in exchange for coats, so that they both benefit. Which of the following arrangements would be an acceptable trade-off of pants and coats that falls between the opportunity costs of both Wynn and Peg?

acceptable trade-off ~8 coats for 25 pants [a coat-to-pant ratio of 8/25ths = 0.32 is between Peg's per-pant opportunity cost of 3/10ths = 0.3 and Wynn's per-pant opportunity cost of 3/9ths ≈ 0.333] ~4 coats for 13 pants [A coat-to-pant ratio of 4/13ths ≈ 0.31 is between Peg's per-pant opportunity cost of 3/10ths = 0.3 and Wynn's per-pant opportunity cost of 3/9ths ≈ 0.333] not an acceptable trade-off ~6 coats for 12 pants ~7 coats for 20 pants [the coat-per-pant ratio needs to be between Peg's and Wynn's opportunity costs for one pair of pants] *[The trading ratio needs to be such that each party comes away with a net gain. If that condition is met, then Peg gains more, in "units of coat," by spending an hour on pant-making than she would by spending that hour on coat-making, and, at the same time, Wynn is better off working on coats to trade for pants than she is working on pants]

When the Wright brothers designed their aircraft, they built a wind tunnel to model the aerodynamics of different wing designs. Identify each of the factors below as endogenous or exogenous to the Wright brothers' model.

air pressure ~exogenous [atmospheric conditions such as air pressure were not controlled] wind and rain ~exogenous [atmospheric conditions such as wind and rain were not controlled] aircraft speed ~endogenous [airspeed was a key endogenous variable] wing angle ~endogenous [wing angle was among the factors the Wright brothers were varying in a controlled way] *[endogenous factors are included in an experiment in a controlled way; exogenous factors are real-world factors excluded from the controlled experimental situation]

Which of the following types of graphs would be appropriate for data about a single variable?

appropriate ~bar graph [this is a good tool for comparing sizes or quantities] ~time-series graph [this helps illustrate info. about a variable over time] ~pie chart [this is a good tool for illustrating proportions] not appropriate ~scatterplot [this type is more appropriate for two variables] *[Economists need to pick the type of graph that will illustrate their data in a way that makes sense]

Match the appropriate label to each specific good.

commercial laser printer ~capital good [a commercial printer is used to produce marketable goods] cement mixing truck ~capital good [a mixing truck is typically used to generate income for construction companies] mountain bike ~consumer good [mountain biking is good for you but is not commercially productive] trip to Disneyland ~consumer good [recreational activities are "today" consumption, not investment] running shoes ~consumer good [shoes are for foot protection, comfort, and appearance. They are not a tool for production of other goods] [the key difference between capital and consumer goods is the difference between a good that delivers direct benefits now and a good that provides benefits in the future]

Which of the following are common terms for spending on infrastructure (such as highways), production facilities (such as factories), schools, attending college, or anything else that will increase future production possibilities?

common term ~capital goods [capital goods are the physical resources used to produce in the future] ~human capital [human capital is the set of skills that workers acquire on the job and through education] ~investment [investment is the general term to increase capital for future production] not a common term ~consumption [consumption is the opposite of the activity described] *[the basic idea of investment is is "Spend resources now to get more later." it does not refer to the purchase of stocks and bonds; one way to earn more later is through increased production on capital goods]

Drag each formula to the part of the graph where it would be most useful.

consumer surplus ~area = 1/2*height*base [the consumer surplus is given by the area of a triangular region] producer's total revenue ~area = height*base [the producer's total revenue is given by the area of a rectangular region] blue slope @ $1.20 to 8000 ~slope = change in y/ change in x [the slope is a measure of how two variables are correlated; in this case, the slope of the line shows how quantity responds to changes in price]

The figure shows the production possibilities frontier for an economy that produces only two goods, pizzas and wings. Label each point in the figure with the appropriate description.

dot on y axis ~maximum pizza dot on slope ~efficient mix of both pizza and wings dot on x axis ~maximum wings dot to right of slope ~not currently possible dot to left of slope ~inefficient mix of both pizza and wings *[maximally efficient production could mean nothing but pizza, nothing but wings, or an efficient mix of both]

What were the key factors that made the Wright brothers' wind tunnel a useful tool for wing design?

key factor ~enabled independent control of each key variable [it was crucial to the Wright brothers that they could change one variable while keeping the others the same] ~allowed measurement of wing performance [the Wright brothers took measurements using over 200 different wing configurations] not a key factor ~could be used without prior knowledge of aerodynamics [the Wright brothers had to know a certain amount of aerodynamics to know what experiments to run and what to measure] ~included an element of unpredictability [one main purpose of the wind tunnel was to eliminate unpredictable (exogenous) factors]

What methods may an economist use to test a hypothesis?

method to test a hypothesis ~gather historical data [sometimes history has already, in effect, "done the experiments" needed to evaluate a hypothesis] ~conduct one or more experiments [this is the standard way to test a hypothesis scientifically] ~wait for real-world events to confirm or refute the hypothesis [sometimes no relevant historical data exists and no experiment is possible] not a method to test a hypothesis ~frame the hypothesis as a normative statement [a normative statement is not testable by scientific observation] ~formulate an alternative hypothesis [this may be necessary after the original hypothesis has been rejected, but it is not part of testing the original hypothesis] *[One way or another, a hypothesis must be translated into predictions with observable consequences]

Identify whether these statements are normative or positive.

normative statement ~everyone should wear a face mask because it is civically responsible to do so [the speaker is voicing his or her opinion about what constitutes civic responsibility] ~Steph Curry is the best point guard because he has the highest shooting average of anyone in the NBA] ~we need a progressive tax system to improve equality and fairness for taxpayers in a society [the speaker of this statement is voicing his or her opinion about the needs of society. Since this is an opinion, the statement is normative] ~income inequality should be minimized in a developed society [the "should" clearly makes this sentence normative] positive statement ~if you practice tennis two hours a day, you will win more matches [the existence of a cause-and-effect relation between practicing and winning can be confirmed by observation] ~the average person lies four times a day [although it can be very difficult to actually determine whether someone told the truth, this is in principle a factual, testable statement] ~Carla will get more exercise at the fair than at a movie [whether or not more exercise would be a good thing for Carla, the difference in exercise between fair attendance and moviegoing is easily documented]

Match the appropriate label to the direction (positive or negative) of the relationship of each pair of variables.

rainfall & number of visitors at a golf course ~negative correlation [people do not normally golf in the rain, so increased rainfall drives golf course attendance down] seat belt and car crash fatalities ~negative correlation [seat belts have been demonstrated to reduce accident fatalities] ice cream sales & temperature ~positive correlation [when the temperature rises, so does ice cream sales. When the temperature decreases, ice creams sales tend to fall] team T-shirts & the winning percentage of the team ~positive correlation [teams sell more items like T-shirts when they are winning. Fans buy less team apparel when their teams are not performing well] *[whether the correlation is positive or negative, the relationship between two variables is ideally graphed on a scatterplot]

In A Knight's Tale, three friends are deciding what to do with 15 silver coins they won in a jousting tournament. They can spend their winnings immediately and live the good life for a while, or they can spend the money on training for the next tournament. They ultimately decide to spend most of the winnings on training for the next tournament. What does their decision represent? More than one choice may be correct.

represented by their decision ~investment [training will increase their chances of taking home the next tournament's prize money] ~trade-off of present for future benefits [choices are all about trade-offs] not represented by their decision ~the only possible decision [the team could have chosen against investing the winnings on their future] ~a focus on consumption goods over capital goods [if they had chosen instead to live the good life for a short time, that would have been a focus on consumption goods] *[the choice between "benefit now" and "benefit later" is rarely obvious or automatic]

Identify each statement as either causing an increase or a decrease in the production of restaurant and bar services during the coronavirus pandemic of 2020, and thus shifting the production possibilities frontier (PPF) outward or inward.

shifts PPF outward ~devising a new system of curbside delivery [many restaurants established a curbside delivery model that allowed them to reopen, while observing social distancing rules] ~installing barriers like sneeze guards and partitions [these along with other measures would be considered a new technology, which allowed restaurants to reopen safely] ~contactless transactions using smartphones [contactless transactions make up over half of all point-of-sale transactions around the world but have been slow to be adopted in the United States (with estimates of less than 5% before the pandemic)] shifts PPF inward ~shortage of cleaning supplies like paper towels [during the pandemic, many restaurants had limited service, in part because they quickly ran out of supplies and other resources] *[Economists use the production possibilities frontier (PPF) model to show how inputs, like access to resources, can directly impact the production of various goods and services. Increases in resources, like a new technology, will shift the entire curve to the right, or outward]

Assume that an economy produces only two goods, pizza and wings, and that it is producing on its production possibilities frontier (PPF). If the economy can only produce two goods, which of the following ways would allow the economy to produce even more pizza?

way to increase the number of pizzas produced ~improved pizza-making technology [if it becomes easier to make pizza, more pizza can be made, since the PPF would rotate outward] ~improved wing-making technology [if only wing-making technology is improved, it is still possible to create more pizzas, because fewer resources are used in the production of wings, thus leaving more available resources for pizza production. The PPF rotates outward. The only time pizza production wouldn't increase is if the economy is producing only wings] ~growth in labor force [more workers means more product] not a way to increase the number of pizzas produced ~some workers move to a country that produces only pizza [losing workers in this economy will reduce output] ~more efficient use of existing production assets [because this economy is producing on its PPF, it is already maximally efficient, given its existing resources] *[any increase in production capacity has an across-the-board effect on the range of total production possibilities]

Calculate the slope of a line passing through point A at (2, 1) and point B at (4, 2). Calculate to one decimal place.

~0.5 [a small positive slope implies a small positive correlation between the two variables] *[a point represents (X,Y). A slope represents the change between two points (change in Y/change in X). Here, the slope is (2-1)/(4-2) = ½, or 0.5]

Calculate the slope of the curve between points B and C.

~1 [(70-50)/(30-10) = (20/20)] [there is a strong positive correlation between the variable on the y axis and the variable on the x axis]

In one week, Jedidiah Schlepp can produce 24 gizmos or 20 whatsits. What is the opportunity cost ratio in gizmos per whatsit? Give the answer to one decimal place.

~1.2 gizmos per whatsit [24 divided by 20 = 1.2. For every 1 whatsit that Jedidiah produces, 1.2 gizmos must be given up and not produced]

The figure shows an increase in resources that shifts the production possibilities frontier from PPF1 to PPF2. Suppose the economy was and is only producing pizzas. How many more pizzas can the economy produce after the shift to PPF2?

~20 pizzas [The maximum number of pizzas the economy could produce with the resources given by PPF1 was 100, and the maximum number of pizzas the economy can now produce with the resources given by PPF2 is 120; thus, the increase is 20]

Which numbers would be used to calculate Blake Piazza's opportunity cost for producing wings?

~24 pizzas [the opportunity cost of producing wings takes into account the alternative product to wings] ~72 wings [The opportunity cost of producing wings takes into account wing-making capacity] *[Blake's opportunity cost of producing wings is the number of pizzas not made per wing that gets made. This is found by dividing 24 by 72]

Tahani and Chidi produce ties and belts. Chidi can produce a maximum of 120 ties or 40 belts and Tahani can produce 90 ties or 60 belts. They decide to specialize in their respective comparative advantage of production, and they agree to trade at a rate of 2 ties = 1 belt. If Chidi agrees to trade 50 ties with Tahani, which of the following represents Tahani's PPF and what she can have after trade?

~90 & 50 ties ~60 & 35 belts [Tahani has the comparative advantage in belts whereas Chidi has the comparative advantage in ties] [if Tahani specialize in belts (60), she will give up 25 belts to get 50 ties] [trade allows Tahani to have 5 more belts and ties than producing them alone]

Dinesh notices that many people with gym memberships are overweight. He concludes that gym memberships make people gain weight. What is the error in Dinesh's confusion as it relates to correlation versus causation?

~Dinesh has the causation backward [people go to the gym because they are overweight, not vice versa]

Malika just got hired by Amazon to work in upper management. She currently lives in South Carolina, and has to move to California for the job. Which of the following would be a good economic reason for her to move her personal belongings on her own rather than hiring someone else?

~Malika's job starts in one month, so she will have one month without work; therefore, the opportunity cost of moving herself is low during this month [since she is not working now, the opportunity cost of moving on her own is lower than the opportunity cost of hiring professional movers]

Which country is a good example of a high present rate of investment and a low present rate of consumer goods consumption?

~Mexico [in Mexico, more economic output goes into savings and infrastructure than in North America and Europe]

What simplifying assumption would explain the straight-line appearance of the production possibilities frontier (PPF) in the figure?

~all workers have the same pizza-making skills and the same wing-making skills [identical worker skills mean that the trade-off between pizza and wings is always constant, no matter what mix of wings and pizza is being produced]

Fill in the blanks to complete the passage about gains from trade. To have - advantage means to be able to produce more using the same resources. To have - advantage means to have a lower -. Comparative advantage is the basis for -. It is - for a producer to have a comparative advantage in both goods.

~an absolute ~a comparative ~opportunity cost ~gains from trade ~impossible *[gains from trade are possible even if all the absolute advantage is with one producer]

Interpret the time-series graph below to determine the five-year time span in which the inflation rate changed the most.

~area b/w1980 & 1985 [inflation plummeted over the first two to three years of this interval] *[time-series graphs make it easy to see how data changes over time]

Suppose Canada is currently planning to produce on PPF1 at point A on the graph shown below. Producing at point A now will allow Canada to produce at point B in the future. Now instead, suppose Canada decides to produce more consumer goods and fewer capital goods than is shown at point A. Click on the area of the graph where the likely future PPF will be if Canada chooses to change the current production of capital and consumer goods as indicated.

~area between slope a & slope b [choosing more consumer goods today will lead to the PPF to expand less in the future as compared to staying with point A] *[more capital now means fewer consumer goods today, but it allows for the possibility of greater capital and consumer goods in the future. Every economy must decide on the trade-off of how much production will go toward present consumption and how much to invest in the future]

Click on the region of the figure that best fits this description: making more pizzas has a very high opportunity cost.

~area near y axis [to make even a few more pizzas would require a large decrease in wing production] *[both ends of the curve are governed by the law of increasing opportunity cost]

In the figure, PPF1 represents society today and PPF2 represents society in the future, after a period of technological progress. Click on the two sections of PPF1 associated with the biggest expansion of PPF2.

~area on y axis [This will lead to the greatest possible expansion of PPF2] ~area near arrow [this will not lead to the greatest possible expansion of PPF2, but the effect will be substantial]

Assume that an economy produces only two goods, pizza and wings. Place the events in order to show how an improvement in pizza-making technology would lead to an increase in wing production.

~better pizza-making technology is developed ~fewer workers are needed to make as much-or even more-pizza as before ~workers are available to make more wings ~more workers making wings means increased wing production [the process illustrates how an increase in one kind of production capacity can lead to increased production in another sector of the economy]

Fill in the blanks to complete the passage about trade-offs. It is characteristic of - goods that they are not used up in the short run. A society can choose to - some quality of life now—fewer consumer goods—in order to build up its stock of capital goods. This will lead to a -—and more consumer goods—later on.

~capital ~sacrifice ~better quality of life *[all societies face a crucial trade-off between consumption in the short run and greater productivity in the long run]

Which of the following is not a characteristic of a good economic model?

~captures the full complexity of a phenomenon [every model is a simplification]

Fill in the blanks to complete the sentence about factors that can impact a model. During the coronavirus pandemic, scientists used models containing multiple variables to help make predictions about the spread of the virus. These variables, also referred to as factors, can either be -, meaning they are - in the model; or -, meaning they are - from the model.

~endogenous ~included ~exogenous ~excluded *[when creating economic models, scientists must determine what variables are endogenous versus exogenous in order to help them find better solutions; in fact, chances are you are already an economist! If you have ever wondered what would happen if you studied for an exam over the course of a week rather than cramming the night before, you are building a model; the endogenous variable you are testing is the number of study sessions you have, and the outcome could be your exam score or perhaps how confident you felt going into the exam; exogenous variables are those things you have no control over—if for instance you got a flat tire on your way to the exam; as scientists, we cannot control for everything—we cannot usually predict spontaneous flat tires, for example—but we try to include all the things we think are most likely to be important in our models, like the amount of time spent studying and whether or not you regularly went to class and did your homework]

A bar graph is usually the best choice for graphing one variable to show proportions.

~false [bar graphs are generally more appropriate for comparisons of size or quantity]

Juan and Wanda both make pancakes and bacon. If we compare the opportunity costs and possible gains from trade for Juan and Wanda, we can determine the exact exchange ratio at which the parties will agree to trade.

~false [the opportunity costs test for Juan and Wanda determines only a range of options, any of which would benefit both of them]

When a society moves from point A to point B along PPF1, the result is that PPF2 expands as shown. What phenomenon does this represent?

~if current production shifts from consumer goods toward more capital goods, future production possibilities are increased [producing fewer consumer goods now is the cost of producing more of everything later]

In economics, the Latin phrase "ceteris paribus" means "other things being equal." How does the assumption of this phrase help economists when building models?

~it assumes all variables remain constant except the one of interest [by assuming no changes to other variables, economists can show how the relationship between the variable of interest and the outcome changes in the model] *[models are an attempt to explain the world in a simplified but useful way; ceteris paribus is an assumption used to simplify the focus of models in economics]

Which graph might represent the relationship between rainfall and raincoat sales?

~left graph w/ positive slope [this graph illustrates a positive correlation. People will need raincoats more when it is raining]

Fill in the blanks to complete the sentence about model failure in the Great Recession. Leading up to the Great Recession, a major problem with computer models used by - to predict the performance of - was that the models were designed to assume that real estate - would always -.

~many banks ~mortgage-backed securities ~prices ~rise *[banks' failure to allow for the possibility of declining real estate values nearly led to the collapse of the entire U.S. financial system]

Fill in the blanks to complete the sentence about the production possibilities frontier. A production possibilities frontier is a - summarizing the different ways a society's - could be used - assuming those resources -.

~model ~production resources ~to full capacity ~remain fixed *[a production possibilities frontier, or PPF, is a model describing options for maximum production]

Place the steps that make up the scientific method in their proper order.

~observe an interesting phenomenon ~develop a hypothesis ~construct a model ~design experiments ~collect results ~assess the hypothesis *[the scientific method is a process for explaining phenomena by formulating and testing hypotheses, and using predictive models]

In a society producing hamburgers and french fries, the workers are producing at point A on the production possibilities frontier (PPF). Suppose there is an increase in the technology for deep fryers that impacts only the production of french fries. Click on another point on the PPF that shows a level of production that reflects improvement in deep fryer technology and shows a level of production where the society is actually producing fewer French fries than it was at point A.

~point D [the potential production of french fries has increased, but at this point society must still give up french fries in order to produce more hamburgers] *[a technology change will change the original PPF of a society, but once it does, the decision of what to produce still faces trade-offs]

Fill in the blanks to complete the passage about positive and normative statements. A - statement can be tested and validated by gathering -. By contrast, a - statement is assessed in light of values and -.

~positive ~data ~normative ~opinions *[economists focus on positive statements, which can be studied scientifically; normative statements are a matter for policymakers, voters, and philosophers]

Homer notices that he gains more weight if he eats more doughnuts. Fill in the blanks to complete the passage about the correlation between weight and doughnuts. There is a - correlation between the number of doughnuts Homer eats and his weight. If Homer wants to lose weight, he should eat - doughnuts. If Homer graphed this relationship (the number of doughnuts and weight gain) on a scatterplot, an increase on the y axis would lead to - on the x axis.

~positive ~fewer ~an increase [if Homer wants to lose weight, he should stop eating doughnuts, although there could be other variables that affect his weight]

Fill in the blanks to complete the passage about consumer goods and capital goods. Trade-offs between the - and the future require weighing the - available today against what will be available tomorrow. A good produced for present - is a - good; a good that will help in the production of other valuable goods for the - is a - good.

~present ~benefits ~consumption ~consumer ~future ~capital *[consumer goods are for present consumption; capital goods are for production of goods to be consumed later]

Fill in the blanks to complete the sentence about the law of increasing opportunity cost. According to the law of increasing opportunity cost, as a society - more and more of a certain good, further production increases involve ever-greater opportunity costs. As a result, producing the good is associated with greater and greater -.

~produces ~trade-offs *[the trade-offs take the form of other goods produced in lesser quantity in order to produce more of the one good]

Natalia notices that if she does not sleep a lot at night, she feels tired the next day. What relationship (if any) exists between hours of sleep and degree of exhaustion?

~there is a negative correlation [more sleep means less exhaustion]

A community of woodworkers produces tables and chairs. If five new members join who specialize in chairs, the community will be able to produce both more tables and more chairs because the increase in labor resources has shifted the entire production possibilities frontier (PPF) upward and outward.

~true [because there are more resources, the entire curve will shift out, even though the new resources specialize in chair production; the PPF shifts out more along the "chair" axis and less along the "table" axis because the new workers are less adept at making tables than they are at making chairs, but the entire curve shifts out; if there were a change in the technology or the production process that applied only to chairs, then the curve would remain fixed on the table axis and shift out only if some number of chairs were produced]

A health club membership could be considered a form of investment.

~true [exercise promotes good health, which in turn promotes future productivity; this is why some companies have in-house gyms for their employees]

An economic model is always a simplification.

~true [much of the value of a model lies in excluding some factors in order to focus on others]

Correlation does not always indicate direct causation.

~true [sometimes a third variable causes two other variables to appear to be related]

Gwen and Blake are the only producers in an economy with two goods, wings and pizza. What is wrong with the following statement? "Whether Blake should make pizza or wings depends on which good he can make more of."

~what matters is not what Blake can make more of but the comparative advantage for each producer [basing the decision on comparative advantage allows Blake and Gwen to make more pizzas and more wings]