ECON175 - Ch. 2 Economic Models: Trade-offs and Trade

Suppose Indiana produces only steel and corn, with fixed amounts of land, labor, and capital resources. Which scenario best sets the stage for economic growth? A. The percentage of Indiana residents with a college degree rises from 25% to 30%. B. The unemployment rate in Indiana rises from 5% to 6%. C. The United States imports more and more low-cost steel from Asian countries. D. The Midwest has a devastating drought.

A. The percentage of Indiana residents with a college degree rises from 25% to 30%

Because of trade, a country may A. consume outside its production possibilities frontier. B. consume inside its production possibilities frontier. C. avoid opportunity costs. D. find its production possibilities frontier shifting inward (to the left)

A. consume outside its production possibilities frontier.

If a country's production possibilities frontier is a straight line sloping down from left to right, then A. the opportunity costs of producing both goods are constant. B. the two products must sell for the same money price. C. more of both goods could be produced moving along the frontier. D. there are no opportunity costs of production.

A. the opportunity costs of producing both goods are constant.

Antonio quit his job as a bartender where he made $38,000 per year to start his own tattoo parlor. His business expenses are $8,000 per year on rent, $9,000 per year on supplies, and $6,000 per year on part-time help. As for his personal expenses, his apartment costs him $9,600 per year and his personal bills are an extra $3,400 per year. What is Antonio's opportunity cost of running the business? A. $74,000. B. $61,000. C. $23,000. D. $36,000.

B. $61,000.

Which statement is a positive economic statement? A. Government has grown too large and should be reduced. B. There has been an increase in the rate of inflation. C. Women should be paid as much as men are for the same work. D. Government should be subject to the same rules as all other institutions.

B. There has been an increase in the rate of inflation.

The production possibilities frontier will shift outward (to the right) if A. the unemployment rate increases. B. better technology that improves worker productivity is developed. C. more men decide to quit their jobs and stay home to home school their children. D. the economy engages in less investment spending.

B. better technology that improves worker productivity is developed.

The institutional production possibilities frontier illustrates that A. economic production possibilities have no limit. B. if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. C. an economy's productive capacity increases one-for-one with its population. D. the economy will never produce using all of its available resources.

B. if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced.

Moving along a production possibilities frontier, the opportunity cost to society of getting more of one good A. is measured in money terms. B. is measured by the amount of the other good that must be given up. C. is always constant. D. usually decreases.

B. is measured by the amount of the other good that must be given up.

Sunk costs A. equal the explicit opportunity costs. B. should not be considered when a person is making an economic decision. C. can only be measured in monetary terms. D. should be considered when a person is making an economic devision.

B. should not be considered when a person is making an economic decision.

The concept of comparative advantage is based on A. the money prices of labor. B. the relative opportunity costs of production. C. the money prices of all output in each economy. D. the amounts of all goods that each economy can produce.

B. the relative opportunity costs of production.

Consider the following information regarding a person's decision to go to college: college tuition is $20,000 per year, room and board at the college is $10,000 per year, and books and materials are $2,000 per year. Suppose that instead of going to college this person could have earned $18,000 annually working in a store. An economist would calculate that this person's opportunity cost of going to college is A. $32,000. B. $20,000. C. $50,000. D. $18,000.

C. $50,000.

What is an economy's opportunity cost of economic growth? A. A high rate of unemployment in the current period. B. The possibility of faster economic growth in the future. C. Current consumption in the current period. D. Physical capital goods in the current period.

C. Current consumption in the current period.

According to the simple economic growth model from class, if the South Korean economy is growing faster than the Japanese economy, it is most likely that A. Japan has more government spending than South Korea. B. South Korea has a higher level of household consumption that does Japan. C. South Korea engages in more real investment than does Japan. D. Japanese firms spend more on physical capital (factors of production) than do South Korean firms.

C. South Korea engages in more real investment than does Japan.

During a war, a government will often draft people, most of who are presently employed, into the army. Which of the following would an economist count as a (opportunity) cost of the war that an accountant would not? A. The cost of training, feeding, and clothing the new soldiers. B. The cost of transporting the soldiers to the combat zone. C. The value of the civilian goods no longer being produced by the new soldiers. D. The cost of providing weapons to the new soldiers.

C. The value of the civilian goods no longer being produced by the new soldiers.

An economy is said to have a comparative advantage in producing good A if it A. can produce less of all goods than another economy. B. can produce more of all goods than another economy. C. has the lowest opportunity cost of producing good A compared with other economies. D. has the highest opportunity cost of producing good A compared with other economies.

C. has the lowest opportunity cost of producing good A compared with other economies.

Consider a production possibilities frontier for Italy. If in 2016 Italy's resources are not being fully utilized, Italy will be somewhere _____ of its institutional production possibilities frontier. A. near the top B. outside C. inside D. near the bottom

C. inside

TRUE/FALSE If the United States is more productive than Mexico in all lines of production, then the United States cannot benefit from trade with Mexico.

FALSE

Explain why economists believe that real-world production should be represented by a production possibilities frontier with a bowed-out curvature rather than a straight line.

Per the law of increasing opportunity cost, the usual production possibilities frontier is bowed outward because some resources are more suited to the production of one good than another.

Consider a nation with a large economy, like the United States, and a nation with a small economy, like the Dominican Republic. The United States has the absolute advantage in the production of all goods compared to the Dominican Republic. Would the United States still benefit from trade with the Dominican Republic? Explain your answer. (What determines whether countries gain from trade?)

Yes, the United States would still benefit from trade with the Dominican Republic even if it has the absolute advantage in the production of all goods. Though the US could theoretically produce anything, it is more efficient for the country to produce goods that it is exceptional at producing or has enough resources to produce and purchase goods in which would they would have had a higher opportunity cost to produce themselves. That is, the US may have a comparative advantage at producing certain goods because the opportunity cost of producing the goods is lower than that of another country. However, the Dominican Republic may also have a comparative advantage and lower opportunity cost of producing certain goods as well. By trading goods they can efficiently produce for goods that another country can produce, the two countries can gain from a trade.