Homework #2
If a country has...
an absolute advantage in producing a good, it might or might not have a comparative advantage in producing that good.
market economy
an economy in which the decisions of households and firms interacting in markets allocate economic resources.
centrally planned economy
an economy in which the government decides how economic resources will be allocated
Which of the following contributed to the downfall of the Soviet Union in 1991?
an inability to produce low - cost consumer goods that households wanted.
Consider a production possibility frontier with books and tables. A combination of 1000 books and 500 tables is on the frontier. Which of the following are true? i) Production of 700 books and 400 tables is attainable but inefficient. ii) Production of 1000 books and 600 tables is unattainable. iii) Production of 500 books and 1000 tables is inside the frontier.
i and ii
In the production possibilities frontier model, an unattainable point lies...
only outside the production possibilities frontier.
In economics, the term capital refers to
physical capital, such as machinery, that is used to produce other goods. The term "Capital" refers to physical capital, such as machinery, that is used to produce other goods.
A country has a comparative advantage in the production of a good if it can...
produce the good at the lowest opportunity cost.
Which of the following is a problem inherent in centrally planned economies?
production managers are more concerned with satisfying government's orders than with satisfying consumer wants.
In a centrally planned economy, the government decides how economic resources will be allocated.
True
The government makes all economic decisions in a centrally planned economy.
True
If Wendy can produce more of all goods than Tommy in an hour, then...
Wendy has an absolute advantage in all goods.
Trade−offs force society to make choices when answering what three fundamentalquestions?
What goods and services to produce; how will these goods and services be produced; and who receives them?
The three economic questions that every society must answer are...
What goods will be produced, how will they produced, and who will receive the goods?
Fast food restaurants produce a range of menu items such as hamburgers, chicken sandwiches, salads, and french fries. What fundamental economic question are they addressing by offering this range of items?
What to produce?
When drawing a production possibilities frontier, which of the following is held constant?
the available factors of production and the state of technology.
How are the fundamental economic decisions determined in Cuba?
the government decides because Cuba is a centrally planned economy.
A freelance singer-songwriter is planning the restoration of a recently purchased civil war-era farmhouse. While he professes an enjoyment of, and talent in the construction trades, the theory of comparative advantage implies that...
the income lost while away from music will likely exceed the savings realized by doing the work himself, thus, he should hire professionals to do the restoration work.
In a free market, the actions people take are largely determined by...
the motivation of financial reward.
In a production possibilities frontier diagram, the attainable production points are shown as
the points inside and the points on the production possibilities frontier.
As we move along the production possibilities frontier...
the production of one good increases as the production of the other good decreases.
The production possibilities frontier illustrates the...
maximum combinations of goods and services that can be produced.
The production possibilities frontier is a graph showing the
maximum combinations of goods and services that can be produced.
The negative slope of the production possibilities frontier represents the idea...
of tradeoffs, that in order to produce more of one good, the nation must produce less of another.
The United States can use all its resources to produce 250 DVDs or 500 shoes. China can use all of its resources to produce 30 DVDs or 300 shoes. The opportunity cost of producing a DVD in the United States is...
2 shoes
Suppose a country operates on its production possibility frontier when it produces 1000 books and 1000 tables. The combination of ________ reflects ________.
500 books and 1000 tables; an inefficient but attainable point.
When one person's opportunity cost of producing a good is lower than another person's opportunity cost of producing the same good, it is called...
A comparative advantage.
What is a free market?
A free market is one where the government does not control the production of goods and services.
The primary difference between absolute and comparative advantage is...
Absolute advantage The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources. Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Societies organize their economies in two main ways to answer the three questions of what, how, and who. A society can have a ___________ economy in which the government decides how the economic resources will be allocated. Or a society can have a _________ economy in which the decisions of households and firms interacting in markets allocate economic resources.
Centrally Planned; Market
If Country A can produce an extra plane by giving up two boats, and Country B can produce an extra plane by giving up three boats, then...
Country A has a comparative advantage over Country B in the production of planes.
Hank requires 1 hour to cut the grass and 3 hours to clean the house. His sister Holly requires 1 hour to cut the grass and 4 hours to clean the house. Which of the following statements is true?
Holly has a comparative advantage in cutting the grass.
A college must decide if it wants to offer more evening and weekend classes. This decision involves answering the economic question of "for whom to produce."
False
In market economies, income distribution is always going to be completely equitable.
False
When voluntary exchange takes place, only one party gains from the exchange...
False
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
For country Gamma the opportunity cost for producing 1 computer is 10 tons of steel. For country Beta the opportunity cost for producing 1 computer is 6 tons of steel. Which country has the comparative advantage in the production of steel?
Gamma
Centrally planned economies allocate resources based on decisions by ________, while market economies answer these questions through decisions made by ______.
Government; Households and Firms.
In a famous essay on the market system, the economist Leonard Read discussed how a pencil sold by the U.S. firm Eberhard Faber Pencil Company (now owned by Paper Mate) was made. He noted that logging companies in California and Oregon grew the cedar wood used in the pencil. The wood was milled into pencil-width slats at a factory in San Leandro, California. The graphite for the pencil was mined in Sri Lanka and mixed with clay purchased from a firm in Mississippi and wax from a firm in Mexico. The rubber was purchased from a firm in Indonesia. Source: Leonard E. Read, I, Pencil: My Family Tree as told to Leonard E. Read, Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc. December 1958. Which of the following statements is true?
It was not necessary for the managers of any of firms that participated in the making of the pencils to know how the components they produced were used to make pencils. It was not necessary for the managers of any of firms that participated in the making of the pencils described in Leonard Read's story to know how the components they produced were used to make pencils. Nor was it necessary for the CEO of the Eberhard Faber Company to have this knowledge. All of the companies were motivated by their own self-interest in providing the materials and services used to make pencils. This is an illustration of Adam Smith's "invisible hand" metaphor.
A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why?
It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed.
John can make pizza at a lower opportunity cost than Allen, but Allen can make more pizzas per day than John. Therefore,...
John has a comparative advantage in pizza.
The decision about what goods and services will be produced in a centrally planned economy is made by...
Lawmakers in the government deciding on what will be produced.
When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods
MUST decrease
Mac can bake more cookies than Monica per hour. It must be true that...
Mac has an absolute advantage in baking cookies.
If John can produce 10 chairs or 20 lamps during a week while Mary can produce 12 chairs or 22 lamps in the same time, who has the absolute advantage in producing each good?
Mary in producing both goods.
production possibilities frontier (PPF) is...
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
When a person has a comparative advantage in producing a good or service, the person has
a lower opportunity cost in producing that product than someone else.
The production possibilities frontier is the boundary between the...
attainable and unattainable combinations of goods and services.
Having a comparative advantage means a nation can
benefit from trade
In what ways does a free market economy differ from a centrally planned economy? Unlike a free market economy,
centrally planned economies have extensive government.
the basis for trade is ___________ advantage.
comparative
When all of the available factors of production are being efficiently employed, the
economy is producing at a point on its PPF.
A free market is a market with ________ government restrictions on how a good or service can be produced or sold and with ________ government restrictions on how a factor of production can be employed.
few; few
Which of the following best describes comparative advantage?
forgoing the fewest units of one product to produce a unit of another product.
If country ABC can produce a unit of good 1 by sacrificing fewer units of good 2 than can country XYZ, it is correct to say that country ABC...
has a comparative advantage in producing good 1. A country has a comparative advantage in a good if it produces the good by sacrificing fewer units of another good compared to other countries.
On the diagram to the right, movement along the curve from points A to B to C illustrates...
increasing marginal opportunity cost. As the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in tank production. Increasing marginal opportunity costs occur because some workers, machines, and other resources are better suited to one use than to another. The idea of increasing marginal opportunity costs illustrates an important economic concept: The more resources already devoted to any activity, the smaller the payoff to devoting additional resources to that activity.
In the diagram to the right, point F indicates an
inefficient result. Combinations on the frontier are efficient (C) because all available resources are being fully utilized, and the fewest possible resources are being used to produce a given amount of output. Combinations inside the frontier are inefficient (F) because maximum output is not being obtained from the available resources-but points beyond the production possibilities frontier are unattainable (G), given the firm's current resources.
While moving along a production possibilities frontier, the amount of labor ________, the amount of capital ________, and the level of technology ________.
is fixed; is fixed; is fixed
Assume that an association of young workers has lobbied Congress to require that all workers retire once they reach the age of fifty. What impact would this law have on the nation's production possibilities frontier?
the production possibilities frontier would shift inward.
In the production possibilities model, the vertical axis measures ________ and the horizontal axis measures ________.
the quantity of a good or service; the quantity of another good or service.
If Toni has an absolute advantage in both sewing and ironing when compared to Tom, then...
they might benefit from trading, but we need more information to determine in which task they should specialize.