Microeconomics Chapter 2: An Economic Model

Economically efficient

choose the way to make something that is the least cost - which of those combinations maximize productivity

A company could produce t-shirts for a $500 profit, long sleeved shirts for a $350 profit, hoodies for a $200 profit, or socks for a $50 profit. If they can only produce one of these four options, what is the opportunity cost of producing t-shirts?

$350

Can you identify the assumptions that we have made in order to create the production possibilities frontier model?

1) There are only two subjects to study for 2) The individual can only study for a total of 6 hours 3) The person has an equal ability in biology and economics

A firm produces pencils or pens. Three workers can produce a total of 10 pens per hour, four workers produce a total of 14 pens per hour, and 5 workers can produce a total of 16 pens per hour. Likewise, three workers can produce a total of 10 pencils per hour, four workers produce a total of 14 pens per hour, and five workers can produce a total of 16 pens per hour. The firm has a total of eight workers and three workers are producing pens and five workers are producing pencils. What is the marginal cost of increasing the production of pens from 10 pens per hour to 14 pens per hour?

2 pencils per hour.

A firm produces pencils or pens. Three workers can produce a total of 10 pens per hour, four workers produce a total of 14 pens per hour, and five workers can produce a total of 16 pens per hour. Likewise, three workers can produce a total of 10 pencils per hour, four workers produce a total of 14 pens per hour, and five workers can produce a total of 16 pens per hour. The firm has a total of eight workers and four workers are producing pens and four workers are producing pencils. What is the marginal cost of increasing the production of pens from 14 pens per hour to 16 pens per hour?

4 pencils per hour

If a production process follows diminishing marginal returns, and an individual produces 10 units in the first hour, how many units they will produce in the second hour? Select all that apply.

9 units then 8 units

If the opportunity cost of an action is greater than the benefits of that action, we would describe the effects on the economy as _______.

Allocatively inefficient and economically inefficient

Economic Models

An abstract description of a part of an economy. Simplifying assumptions are made, with a goal of understanding and explaining the effects of economic events.

Production Possibilites frontier

An economic model showing possible combinations of outputs, given resources and technology.

Which of the following are examples of diminishing marginal returns?

Chopping fewer bundles of wood each hour because you are tired. With each additional hour that a hiker walks they cover fewer and fewer miles in that hour.

Why does the law of diminishing returns apply to so many different types of production? Why does that mean increasing marginal costs?

Diminishing returns applies in so many cases because it refers to what happens to increases in output of scores, goods, and all kinds of activities when we increase only one input and hold all others constant. It means that we expand labor, but don't expand the capital which the workers use. Adding one worker increases production a great deal. A second and third might increase output even more. However, eventually an additional worker will begin to add less and less output to the process. The worker simply may not have sufficient tools, space, or material with which to work. Diminishing returns implies increasing marginal costs. The reason is that if one additional worker costs $100 per day, for example, and that worker expand production by 10, the cost of each of those additional units of output is $10 per additional unit ($100 / 10). When we face diminishing returns, that additional worker may only product 8 units of additional output. Thus, the cost ($100 / 8) of those additional units of output will increase to $12.50.

What happens to the scores in both subjects as we increase time spent studying biology?

If we increase time spent studying biology, our score in biology will go up. However, the more we spend studying biology, the less time we can study economics. Meaning that our economics score will go down.

As resources are moved from the production of one good to another, we would normally expect the cost of producing one more unit of the new good to _______.

Increase

Diminishing marginal returns

Increasing one input, while holding all other inputs constant, will eventually result in smaller and smaller additions to output.

Which of the following best describes the relationship between diminishing marginal returns and marginal cost?

Marginal cost must increase as output increases due to diminishing marginal return.

Describe, in your own words, the principal concepts in the production possibilities frontier economic model.

The PPF is a graph that displays different combinations of output. It shows what the business or individual can produce given the available factors of productions. If you have a curved PPF, then that means that there is an increasing opportunity cost. If you have a linear PPF, the opportunity costs are constant. Anything below the PPF is attainable, but is considered to be inefficient because you are increasing one good without sacrificing any other. Anything on the PPF is attainable and efficient. Anything above the PPF is unattainable at that time.

Consider two possible production possibility frontiers A and B. One is a straight line as show in A and the other is concave toward the origin in B. Describe what happens to opportunity cost of producing desktop computers as desktop production is increased for graph A and graph B.

The opportunity cost in graph A is constant. If you were to produce 8 thousand desktop computers, you opportunity cost would be only making 2 thousand laptops. Graph B, however, shows more of what our economy looks like. Many businesses specialize in making one product better/faster than the other. So, in graph B the opportunity cost for producing 8 thousand desktop computers would be making 0 laptops. You would be giving up more laptops to make more desktops.

In what manner do the scores in biology increase? At a faster or slower pace as more time is devoted to studying biology?

With each additional hour spent studying biology, test scores increase, but at a slower and slower pace. This is the concept of diminishing marginal returns.

Is it possible to have allocative efficiency without technical efficiency?

Yes, allocative efficiency only requires that the economy is producing to match the wants and needs of the economy. This can be done without producing as much as possible.

Principle of increasing marginal costs

is the idea that the opportunity cost of producing one more unit of a good increases and the production of that good increases.

Technically efficient

not wasting any inputs - using all of our resources - every point on the PPF is technical efficiency.

Allocative efficiency

produce the things that produce the most amount of utility.