Chapter 2 Economics 18th edition Problems, What should you know, Self checks

Distinguish between absolute and comparative advantage

A person ha san absolute advantage if she can produce more of a good than someone else who uses the same amount of resources. An additional can gain from specializing producing a good if she has a comparative advantage in producing that good, meaning that she can produce the good at a lower opportunity cost than someone else.

Evaluate why everyone, whether poor or affluent, faces the problem of scarcity

Event the richest people face scarcity because they have to make choices among alternatives. Despite their high levels of income or wealth, affluent people, like everyone else, want more than they can have (in terms of goods, power, prestige, and so on).

__________ are unlimited. They include all material desires and all nonmaterial desires, and all nonmaterial desires, such as love, affection, power, and prestige.

Wants

2-18. Country A and Country B produce the same consumption goods and capital goods and currently have identical production possibility possibilities curves, They have also have the same resources at present, and they have access to the same technology. a. At present, does either country have a comparative advantage in producing capital goods? Consumption goods? b. Currently country A has chosen to produce more consumption goods, compared with country B. Other things being equal, which country will experience the larger outward shift of its PPC during the next year?

a) As both the countries have similar technology, resources and production possibilities neither of them will have a comparative advantage over other. b) By producing more of physical capital an economy will increase its future production capabilities shifting the PPF curve outwards. So by choosing a combination with more capital goods production country A will experience a larger outward shift in its PPC in the next year.

2-13. A nation's residents can allocate their scarce resources either to producing consumption goods or to producing human capital- that is, providing themselves with training and education. The table at the top of next column displays the production possibilities for this nation: a) Suppose that the nation's residents currently produce combination. A. Wat is the opportunity cost of increasing production of consumption goods by 10 units? by 60 units? b) Does the law of increasing additional cost hold true for this nation? Why or why not?

a) When the nation's residents currently produce combination A, then, the opportunity cost of increasing production of consumption goods by 10 units will be 3 units (100 - 97) of human capital forgone and by 60 units, it will be 100 units of human capital forgone. b) Law of increasing additional cost state that the opportunity cost of producing a particular good is keep on increasing as firm attempt to produce more of that good. This will result in a bowled-out shape of the production possibilities curve. The given combination is represented the same as shown in figure 1: In figure one the production of consumption goods is increase by constant number. Hence the horizontal red lines are of equal in length. However, the length of vertical red lines are increases as it move down the production possibilities curve. This is happened because the opportunity cost of each additional equal increase in production of consumption. Table-2 shows the opportunity cost of producing consumption goods. Table 2 Hence, the answer is Yes, that the law of increasing additional cost hold true for this nation because each 10-unit increase in production of consumption goods needs larger sacrifices of human capital. As clear from the table, with each 10 units increase in production of consumption goods, human capital forgoes by 3, 7, 15, 20, 25, and 30 respectively.

Comparative advantages are found by determining which activities have the __________ opportunity costs- that is, which activities have __________opportunity costs-that is, which activities used. A __________ of labor occurs when different workers are assigned different tasks. Together, the workers produce a desired product.

division

A production possibilities curve is drawn holding the quantity and quality of all resources __________ over the time period under study.

fixed

A __________ __________curve graphically shows the trade-off that occurs when more of one output is obtained at the sacrifice of another. This curve is a graphical representation of, among other things, opportunity cost.

production possibilites

Trade-offs are represented graphically by a __________ __________ curve showing the maximum quantity of one good or service that can be produced, given a specific quantity of another, from a given set of resources over a specified period of time- for example, one year.

production possibilities

The concept of __________ is difficult to define objectively for every person. Consequently, we simply consider every person's wants to be unlimited In a world of scarcity, satisfaction of one want necessarily means nonsatisfaction of one or more other wants.

need

Another way to look at opportunity cost is the trade off that occurs when one activity is undertaken rather than the __________-__________ alternative activity.

next-best

Scarcity requires us to choose. Whenever we choose, we lost the__________-__________-valued alternative.

next-highest

2-8. Consider a change in the table in problem 2-6. The student's set of opportunities is now as follows. Does the PPC illustrate the law of increasing additional cost? What is the opportunity cost to this student for additional cost? What is the opportunity of study time on economics required to move her grade from 60 to 70? From 90 to 100?

1) A PPC (also called PPF) is a curve that represents the possible combinations of maximum outputs that can be produced. The PPF is drawn for a constant stock of resources and a given level of technology. The PPF between Economics and Biology is drawn in Figure 1 below. 2) Here, the PPC has a constant opportunity cost which is represented by the straight line downward sloping PPC in Figure 1. When the student studies Economics for quite some time, the grades are 60. When the student switches off one hour from Biology to Economics at this point, the improvement in grades is 10 (in Economics) for a loss of 10 (in Biology). This trade-off or the opportunity cost of 1 grade of Economics therefore 1 grades of Biology. Figure 1 When the student studies Economics for quite some time, the grades are 90. When the student switches off one hour from Biology to Economics at this point, the improvement in grades is 10 (in Economics) for a loss of 10 (in Biology). This trade-off or the opportunity cost of 1 grade of Economics therefore 1 grades of Biology. Hence the opportunity cost is constant and does not follow the law of increasing additional cost.

2-11. In response to Senator Creighton's statement reported in problem 2-10, Senator Long replies, "We must remain at our current production combination if we want to be able to produce more consumption goods in the future." Of the labeled points on the diagram, which one could depict the future production combination Senator long has in mind?

1) The diagram below illustrates the production possibility curve of consumption and capital goods of United States. 2) Compared with other points on the diagram, point D shows the future production combination that the senator is talking about.

2-6. The following table illustrates the points a student can earn on examinations in economics and biology if the student uses all available hours for study. Plot this student's production possibilities curve. Does the PPC illustrate the law of increasing additional cost?

1. A PPC (also called PPF) is a curve that represents the possible combinations of maximum outputs that can be produced. The PPF is drawn for a constant stock of resources and a given level of technology. The PPF between Economics and Biology is drawn in Figure 1 below. 2. One of the striking feature of PPC is an increasing opportunity cost of production along the PPC. The fact that PPC increases as labors produce more and more of that good calls for the bowed-out shape of the production possibilities curve. Figure 1 Observe that when the students switches off one hour from Economics to Biology at the beginning, the improvement in grades is 10 (in Economics) for a loss of 2 (in Biology). This trade-off or the opportunity cost becomes 10 (in Economics) for a loss of 20 (in Biology). Hence the opportunity cost is increasing and law of additional opportunity cost is verified.

2-7. Based on the information provided in problem 2-6, what is the opportunity cost to this student of allocating enough additional study time on economics to move her grade up from a 90 to a 100?

1. A PPC (also called PPF) is a curve that represents the possible combinations of maximum outputs that can be produced. The PPF is drawn for a constant stock of resources and a given level of technology. The PPF between Economics and Biology is drawn in Figure 1 below. 2. The fact that PPC increases as labors produce more and more of that good calls for the bowed-out shape of the production possibilities curve. Figure 1 When the student devotes all the time in studying economics, the grades are 100. When the student switches off one hour from Economics to Biology at this point, the improvement in grades is 20 (in Biology) for a loss of 10 (in Economics). Putting it differently, a move from 90 to 100 increase the grades in Economics by 10 but reduces the grade in Biology by 20. This trade-off or the opportunity cost of 1 grade of Economics therefore 2 grades of Biology

2-12. Senator Bormann interject the following comment after the statements by Senators Creighton and Long reported in problems 2-10 and 2-11: "In fact, both of my esteemed colleagues are wrong , because an unacceptably large portion of our nation's resources is currently unemployed." Of the labeled points on the diagram, which one is consistent with Senator Bormann's position?

1. A production possibility curve\frontier (PPF) depicts the possible combination of all the goods and services produced by an economy given a set of inputs, which consist of resources and other factors. It represents trade-offs possibilities given fixed level of resources. It assumes that all inputs are employed efficiently. 2. The area under the PPF shows the all possible combinations of goods and services where the resources are not fully employed. That is, the area below the curve depicts a situation of under-production. Point 'A' in the given figure shows that the economy is under-producing. 3. If the economy is producing on the PPF, this means that the resources are employed efficiently and the all the combinations are desirable. Point 'C' and 'B' shows the combination of capital and consumption goods that are efficient and desirable for the economy. If the economy moves from point 'C' to point 'B', then the production of capital goods will decrease and the production of consumption goods will increase. 4. On the other hand, the area above the PPF shows the resources are over-employed and the economy is over producing. Point 'D' on the given graph shows this scenario. 5.The Senator 'C' states that the economy is currently at point 'C' where the resources are fully employed and the outcome is desirable. He argues that the current combination is in favor of Capital goods because these goods are produced in greater number relatively to consumption goods. Hence, the economy has made the choice of a higher production of capital goods in comparison to consumption goods, which is shown by the point 'C' on the PPF. 6. The Senator 'L' comes forward and states that the economy is currently at point 'C' where the resources are fully employed and the outcome is desirable. He argues that the current combination is the optimal combination and the economy should stay at this point. If it stays at point 'C', then only the economy will be able to produce more consumption goods in the future. He refers to a situation where the production of consumer goods will be higher and this is represented by the point 'B' on the PPF. Hence, the senator 'L' argues that the production of consumption goods will be higher in future, which is shown by the point 'B' on the PPF. 7.Senator 'B', on the contrary, denies arguments of other Senators by saying that a large portion of nation's resources is not fully employed. This essentially means that the economy is operating inside the PPF where the resources are not efficiently utilized. Thus, the economy is under producing and operating below the desirable capacity. Senator 'B' position on the debate is at point 'A', which shows under-production of goods and services due to inefficient resource allocation.

2-10. During a debate on the floor of the U.S. Senate. Senator Creighton states "our nation should not devote so many of its fully employed resources to producing capital goods because we already are not producing capital goods because we already are not producing enough consumptions goods for our citizens." Compared with the other labeled points on the diagram, which one could be consistent with the current production combination choice that Senator Creighton believes the nation has made?

1. A production possibility curve\frontier (PPF) depicts the possible combination of all the goods and services produced by an economy given a set of inputs, which consist of resources and other factors. It represents trade-offs possibilities given fixed level of resources. It assumes that all inputs are employed efficiently. 2. The area under the PPF shows the all possible combinations of goods and services where the resources are not fully employed. That is, the area below the curve depicts a situation of under-production. Point 'A' in the given figure shows that the economy is under-producing. 3. If the economy is producing on the PPF, this means that the resources are employed efficiently and the all the combinations are desirable. Point 'C' and 'B' shows the combination of capital and consumption goods that are efficient and desirable for the economy. If the economy moves from point 'C' to point 'B', then the production of capital goods will decrease and the production of consumption goods will increase. 4.On the other hand, the area above the PPF shows the resources are over-employed and the economy is over producing. Point 'D' on the given graph shows this scenario. 5. The Senator states that the economy is currently at point 'C' where the resources are fully employed and the outcome is desirable. He argues that the current combination is in favor of Capital goods because these goods are produced in greater number relatively to consumption goods. If it were point 'B' instead, then this means the consumption goods are produced in greater number relatively to capital goods given the efficient employment of resources. Hence, the economy has made the choice of a higher production of capital goods in comparison to consumption goods, which is shown by the point 'C' on the PPF.

2-9. Construct a production possibilities curve for a nation facing increasing opportunity costs for producing food and video games. Show how the PPC changes given the following events. a. A new and better fertilizer is invented. b. Immigration occurs, and immigrants labor can be employed in both the agricultural sector and the video game sector. c. People invent a new programming language that is much less costly to code and is more memory efficient. d. A heat wave and drought result in a 10 percent decrease in usable farmland.

1. A production possibility frontier or the PPF curve shows the possible outcomes of the combination of two goods or services an economy can achieve when all the resources are fully employed. 2. The below shown is the production possibility curve for a nation facing increasing opportunity costs for producing food and video games. An increase in the opportunity cost means that the production possibility curve is concave to the origin. 3. a PPC will change when a new and better fertilizer is invented as shown in the diagram below. A better fertilizer results in an increase in the amount of food that could be produced with the same amount of resources. Below graph shows the changes in the PPC curve. 4. b) When immigration occurs, and immigrants' labor got employed in both the agricultural sector and the video game sector, then, the PPF will change as follows: Since the labor could be employed in producing either, this would increase the amount. Therefore, the PPC shifts outwards. 5. c) When a new programming language is invented that is less costly to code and is more memory efficient, then, the PPC will look like as drawn below: 6. There would be an extension of PPC in the direction of food compared to video games. 7. d) When a heat wave and draught result in a 10 percent decrease in usable farmland, then, the PPC will look like as shown below: The PCC is moved inward for food production because less farmland means less food can be produced.

2-14. Like physical capital, human capital produced in the present can be applied to the production of future goods and services. Consider the table in problem 2-13, and suppose that the nation's residents are trying to choose between combination and combination F. Other things being equal, will the future production possibilities curve for this nation chooses combination F instead of combination C? Explain.

1. No, the economy's future PPF curve will not be farther outwardly located if it chooses combination F instead of combination C. we can understand this situation to use below table: 2. Production Combination Use of Consumption Goods Use of Human Capital 3. By producing more of physical capital an economy will increase its future production capabilities shifting the PPF curve outwards. If the human capital gives the same benefits like that of physical capital than consuming more resources for human capital will shift the production capabilities of the economy further towards its right. 4. Between combination C and F, combination C produces 90 units of human capital which is higher than the combination F. So when the economy produces at combination C the future production possibilities curve will be farther rightwards than when the economy chooses combination F.

2-1. Define opportunity cost. What is your opportunity cost of attending a class at 11:00 A.M? How does it differ from your opportunity cost of attending a class at 8:00 A.M.?

1. Opportunity Cost is defined as the opportunity forgone in order to gain benefit from next best alternative. In other words, it is defined as the next best alternative adopted by a person among the available choices. Opportunity cost of attending a class can be related to sleep hour enjoyed, movie watched, game played etc. 2. The opportunity cost of attending the class at 11:00 AM will be higher than the opportunity cost of attending the class at 8:00 AM, if you are early riser because you value additional hour of sleep in the morning. 3. On the other hand, the opportunity cost of attending class at 8:00 AM will be lower if you are early riser because you have fewer choices at that time compared to 11:00 AM when you can enjoy movies, shopping or anything you like and you will always be available at that time for attending classes.

2-2. Of you receive a ticket to a concert at no charge, what, if anything, is your opportunity cost change if miserable weather on the night of the concert requires you to leave much earlier for the concert hall and greatly extends the time it takes to get home afterward?

1. The Opportunity Cost of attending a concert could be the rest taken, time spent with family or movie watched whatever is the next best alternative you consider for you. Here, the opportunity cost is considered in terms of time you spend in attending a concert or the time you could have spent at your home doing different activities or enjoyment with 2. The opportunity cost will change if miserable weather on the night of the concert requires you to leave much earlier the concert hall and extends the time it takes to get home afterwards. In this case, the opportunity cost of attending the concert will be the enjoyment foregone at your home instead of attending the concert plus the time you spent in concert.

2-15. You can wash, fold, iron. a basket of laundry in three hours and prepare a meal in one hour. Who has the absolute advantage in laundry and who has an absolute advantage in meal preparation? Who has the comparative advantage in metal preparation?

1. The production capabilities of myself and my roommate can be summarized in the below table. 2. Absolute Advantage: As I can wash laundry and iron a basket of cloth in 2 hours lower than my roommate, I possess an absolute advantage in this activity. For meal preparation both of us are taking the same time so none of us have an absolute advantage in meal preparation. 3. Comparative Advantage: The person with lowest opportunity cost is said to have a comparative advantage in an activity. 4. Opportunity Cost for Me: for producing 1 cloth (wash laundry and iron a basket) I have to sacrifice 2 meals. So my opportunity cost of cloth is 2 meals. And similarly opportunity cost for 1 meal I have to sacrifice 0.5 cloths. 5. Opportunity Cost for my roommate: for producing 1 cloth (wash laundry and iron a basket) my roommate has to sacrifice 3 meals. So his opportunity cost of cloth is 3 meals. And similarly opportunity cost for 1 meal his opportunity cost is 0.33 cloths. 6. Comparative Advantage: As I incur lower opportunity cost in cloth I have the comparative advantage in cloth (wash laundry and iron a basket). And my roommate having lower opportunity cost in meal preparation has a comparative advantage in meal preparation.

2-16. Based on the information in problem 2-15, should you and your roommate specialize in a particular task? Why? If so, who should specialize in which task? Show how much labor time you save if you choose to "trade" an appropriate task with your roommate as opposed to doing it yourself.

1. The production capabilities of myself and my roommate can be summarized in the below table. 2. Absolute Advantage: As I can wash laundry and iron a basket of cloth in 2 hours lower than my roommate, I possess an absolute advantage in this activity. For meal preparation both of us are taking the same time so none of us have an absolute advantage in meal preparation. 3. Comparative Advantage: The person with lowest opportunity cost is said to have a comparative advantage in an activity. Opportunity Cost for Me: for producing 1 cloth (wash laundry and iron a basket) I have to sacrifice 2 meals. So my opportunity cost of cloth is 2 meals. And similarly opportunity cost for 1 meal I have to sacrifice 0.5 cloths. Opportunity Cost for my Roommate: for producing 1 cloth (wash laundry and iron a basket) my roommate has to sacrifice 3 meals. So his opportunity cost of cloth is 3 meals. And similarly opportunity cost for 1 meal his opportunity cost is 0.33 cloths. 4. Comparative advantage: As I incur lower opportunity cost in cloth I have the comparative advantage in cloth (wash laundry and iron a basket). And my roommate having lower opportunity cost in meal preparation has a comparative advantage in meal preparation, and as I am having a comparative advantage in cloth preparation and my roommate having a comparative advantage on meal preparation. It will be advantageous for both of us to specialize in these activities. 5. Without trade: 6. If we were not specializing than for the same goods to produce we would be spending 3 hours (2hrs for cloth and 1hr for food) by me and my roommate spends 4 hours for 1 cloth and 1 meal. Total we will be spending 7 hours. 7. With trade: Based on our specializations if I do cloths and my roommate cooks than in 4 hours I can do cloth for both of us and in remaining 3 hours he can cook 3 meals. 8. Based on the specialization we are gaining 1 extra hour which is spent here to get extra meal.

__________ goods are good that will later be used to produce consumer goods. A trade-off is involved between current consumption and capital goods or, alternatively, between current consumption and future consumption. The __________ we invest in capital goods today, the greater the amount of consumer goods we can produce in the future and the __________ the amount of consumers goods we can produce today.

Capital, more, smaller

2-3.You and a friend decide to spend $100 each on concert tickets. Each of you alternatively could have spent the $100 to purchase a textbook, a meal at a highly rated local restaurant, or several internet movie downloads. As you are on the way to the concert, your friend tells you that if she had not bought the concert ticket, she would have opted for a restaurant meal, and you reply that you otherwise would have downloaded several movies. Identify the relevant opportunity costs for you and your friend of the concert tickets that you purchased. Explain briefly.

If I and my friend alternatively decide to spend the $100 on a restaurant meal and downloading movies from the internet instead of going for the concert, the relevant opportunity cost for both of us will be as follows: If we spend the $100 on a restaurant meal the opportunity cost for my friend will be equal to $100 foregone by her on the meal, If alternatively now $100 are spent on downloading movies instead the opportunity cost for me will be equal to $100 worth of downloading

2-4. After the concert discussed in problem 2-3 is over and you and your friend are traveling home, you discuss how each of you might otherwise have used the four hours devoted to attending the concert. The four hours could have been used to study, to watch a sporting event on TV, or to get some extra sleep. Your friend decides that if she had not spent four hours attending the concert, she would have chosen to study and you reply that you otherwise would have watched the televised sporting event. Identify the relevant opportunity costs for you and your friend for allocating your four hours to attending the concert. Explain brlefly.

If instead of going for the concert for four hours, both I and my friend used the four hours for study and watching sports on television, the relevant opportunity cost in terms of time will be as follows: If my friend used the time for study her opportunity cost will be equal to four hours which she had to forgo in order to attend the concert, similarly for me the opportunity cost will be four hours which I had to forgo to watch the concert.

Explain why the economy faces a trade-off between consumption goods and capital goods

If we allocate more resource's to producing capital goods today, then the production possibilities curve will shift outward by more in the future, which means that we can additional future consumption goods. The trade-off is that producing more capital goods today entails giving up consumption goods today.

2-17. Using only the concept of comparative advantage, evaluate this statement: " A professor with a Ph.D. in physics should never mow his or her own lawn, because this would fail to take into account the professor's comparative advantage."

In general cases a professor with a Ph.D. can earn a higher pay for spending an hour on mowing his own yard, so the opportunity cost of mowing is the lost opportunity to earn money by taking a lecture. But if we consider other factors like; the professor was retired and no other alternative than mowing his own yard will give him comparative advantage.

Explain why the scarcity problems causes people to consider opportunity costs and trade-offs among choices

Opportunity cost is the highest valued alternative that one must give up, to obtain an item. The trade offs people face can be represented by a production possibilities curve (PPC). Moving along a PPC from one point to another entails incurring an opportunity cost of allocating scare resources toward the production of one good instead of another good.

Points __________ the production possibilities curve are unattainable. Points __________ are attainable but represent an inefficient use or underuse of available resources.

Outside, inside

__________is the situation in which human wants always exceed what can be produced with the limited resources and time that nature makes available.

Scarcity

2-5. Recently, a woman named Mary Krawiec attended an auction in Troy New York. At the auction, a bank was seeking to sell a foreclosed property: a large Victorian house suffering from years of neglect in a neighborhood om which many properties had been on the market for years yet remained unsold. Her $10 offer was the highest bid in the auction, and she handed over a $10 bill for a title to ownership once she acquired the house, however she became responsible for all taxes on the property and for an overdue water bill of $2000. In addition to make the house habitable, she and her husband devoted months of time and unpaid labor to renovating the property. In addition, to make the house habitable, she and her husband devoted months of time and unpaid labor to renovating the property. in the process, they incurred explicit expenses totaling $65,000. Why do you suppose that she bank was willing to sell the house to Ms. Krawiec for only $10.?

The bank was willing to sell the house to Ms. Krawiec for only $10 because the bank considered their opportunity cost of repairing the house, which was less and their anticipated net gain from selling the house to someone else. As the house needed huge investment for making the house habitable and taxes and bills to be paid. So, the bank considered to sell this house from whomever she gets highest bid in the auction.

Discuss why obtaining increasing increments of any particular good typically entails giving up more and more units of other goods

When people allocate additional resources to producing more units a good, it must increasingly employ resources that would be better suited for producing other goods. As a result, the law of increasing additional cost holds. Each additional cost holds. Each additional unit of a good can be other goods. Hence, the production possibilities curve is bowed outward.

Individuals and nations specialize in their areas of __________ advantage in order to reap the gains of specialization.

comparative

With a given set of resources, specializatiion results in __________ output. In other words, there are gains to specialization in terms of greater well being.

higher

We use scarce resources, such as ____________, _______________, ___________ and ____________ capital, and _________________, to produce economic goods-goods that are desired but are not directly obtainable from nature to extent demanded or desired at a zero price.

land, labor, physical, human, entrepreneurship

Cost is always a forgone __________.

opportunity

Because so many resources are better suited for certain productive tasks than for others, the production possibilities curve is bowed __________, reflecting the law of increasing additional cost.

outward