Macro Chapter 02: Production Possibilities, Opportunity Cost, and Economic Growth

Suppose a major technological breakthrough occurs in the capital goods industry, and the new technology is widely adopted only in this industry. The new PPC is represented by_______________ Suppose that instead of this first breakthrough, a technological advance occurs in consumer goods production, but not in capital goods production. Now the new PPC is represented by_____________

PPC3 PPC2

opportunity cost

The best alternative sacrificed for a chosen alternative.

law of increasing opportunity costs

The principle that the opportunity cost increases as production of one output expands.

Which of the following are examples of opportunity costs? Check all that apply.

The time spent preparing for a test cannot be spent playing computer games. The money spent on a movie ticket cannot buy a Blu-ray player. A firm cannot buy new treadmills for its on-site gym facility once it spends this money on new adjustable desks for employees. Explanation: Opportunity cost is the best alternative sacrificed for a chosen alternative. Stated differently, it is the cost of not choosing the next-best alternative. This principle states that some highly valued opportunities must be forgone in all economic decisions. The highest-valued good or use of time given up for the chosen good or use of time measures the opportunity cost. See section: "Opportunity Cost."

Which of the following is not one of the three fundamental economic questions? What happens when you add to or subtract from a current situation? For whom to produce? How to produce? What to produce?

What happens when you add to or subtract from a current situation?

Three fundamental economic questions facing any economy are

What, How, and For Whom to produce goods.

You might have heard the common saying "There is no such thing as a free lunch." Suppose that you are invited to a free lunch at which a company will be demonstrating its new home theater system. Which of the following represent scarce resources that you are using up in attending this "free lunch"?

Your time Scarce Resource Used for "Free Lunch" Money you normally would have spent on lunch Resource Not Used for "Free Lunch" Gasoline consumed driving to lunch Scarce Resource Used for "Free Lunch" explanation: Because you have used gas to drive to the lunch, the gas cannot be used for anything else such as driving to the movies tonight. You also cannot use the time you spend at the lunch for another activity. These alternatives that you are forgoing are "costs" for this lunch. You are not giving up any money for the lunch, as you would on a normal day, but these other costs are just as real. See Section 2-2 for more explanation.

2.3: Marginal analysis means which of the following changes from a current situation. a. Positive or negative. b. Infinite. c. None. d. Maximum.

a. Positive or negative. -Correct. Marginal analysis is an examination of the effects of additions to or subtractions from a current situation.

2.7: In the study of economics, investment means a. the accumulation of capital that is used to produce goods and services. b. owning stocks and bonds. c. the principle that the opportunity cost increases as the production of one output expands. d. the effect of stock prices on the production possibilities curve.

a. the accumulation of capital that is used to produce goods and services. Correct. This is the economic definition of investment.

2.6: Suppose an economy can produce various combinations of fish and bread. If more people with strong fishing skills became employed in this economy, how would the production possibilities curve (PPC) change? a. The PPC would shift outward on the fish axis, but would not change on the bread axis. b. The PPC would shift outward equally along both the fish and the bread axes. c. The PPC would shift inward on the bread axis, but would not change on the fish axis. d. The PPC would shift inward equally along both the fish and bread axes.

a. The PPC would shift outward on the fish axis, but would not change on the bread axis. Correct. Increasing productive labor resources in fishing increases the PPC along the fish axis, but no resources have been added to the production of bread.

A nation can accelerate its economic growth by reducing the number of immigrants allowed into the country. adding to its capital stock. printing more money. imposing tariffs and quotas on imported goods.

adding to its capital stock.

The production possibilities curve consists of all efficient output combinations

at which an economy can produce more of one good only by producing less of the other good.

2.2: Suppose that the alternative uses of an hour of your time in the evening, ranked from best to worst, are (1) study economics, (2) watch two half-hour TV sitcoms, (3) play video games, and (4) jog around town. You can only choose one activity. What is the opportunity cost of studying economics for one hour, given this information? a. Jogging around town. b. Watching two half-hour TV sitcoms. c. Playing video games. d. The sum of watching two half-hour TV sitcoms, playing pool, and jogging around town.

b. Watching two half-hour TV sitcoms. -Correct. This is the best of the best alternative use of your time, since each is ranked from best to worse. The second best alternative is to watch the sitcoms.

2.2: Which of the following does not illustrate opportunity cost? a. If I study, I must give up going to the football game. b. If I buy a computer, I must do without an ipad. c.More consumer savings means more spending in the future. d. If I spend more on clothes, I must spend less on food.

c .More consumer savings means more spending in the future. -Correct. The concept of opportunity cost is more requires less.

2.3: Which of the following is an example of an organization using marginal analysis? a. A hotel manager calculating the average cost per guest for the past year. b. A farmer hoping for rain. c. A government official considering the effect an increase in military goods production will have on the production of consumer goods. d. A business calculating economic profits.

c. A government official considering the effect an increase in military goods production will have on the production of consumer goods. -Correct. Marginal analysis is an examination of the effects of additions to or subtractions from a current situation.

Which of the following decisions must be made by all economies? How much to produce? When to produce? How much does it cost? What is the price? Who will produce it? Who will consume it? What to produce? How to produce? For whom to produce? None of the answers above are correct.

c. What to produce? How to produce? For whom to produce?

2.4: A production possibilities curve shows the various combinations of two outputs that a. consumers would like to consume. b. producers would like to produce. c. an economy can produce. d. an economy should produce.

c. an economy can produce. Correct. This is what a production possibilities curve does show.

2.6: An economy can produce various combinations of food and shelter along a production possibilities curve (PPC). Suppose a technological innovation resulted in a new, higher-yielding crop that generated more bushels of grain for a given set of land, labor, and capital resources. If this innovation did not affect the productivity of shelter production, which of the following would be true? a. The PPC will shift outward equally along both axes of the graph. b. The PPC will rotate inward along the food axis, but will not shift on the shelter axis. c. The PPC will rotate outward along the food axis, but will not shift on the shelter axis. d. The PPC will not change.

c. The PPC will rotate outward along the food axis, but will not shift on the shelter axis. Correct. The PPC shifts outwards along the food axis, but does not change along the shelter axis, since only those resources used to produce food became more productive.

2.7: With time, which one of the following strategies would most likely result in an outward shift in the production possibilities curve of an economy? a. passage of legislation reducing the workweek to 20 hours. b. instituting a tax policy encouraging consumption at the expense of investment. c. instituting a tax policy encouraging investment at the expense of consumption. d. an increase in government programs that reduce the insensitive to work.

c. instituting a tax policy encouraging investment at the expense of consumption. Feedback Correct. Less consumption and more investment shifts the production possibility curve outward.

In general, workers are better at some things than others. This means that workers_____ be perfectly substituted for each other in a production process. This will cause __________ opportunity costs. Because opportunity costs behave this way, the production possibility frontier ___________ .

cannot increasing bows out expl: The lack of perfect interchangeability between workers is the cause of increasing opportunity costs and the bowed-out shape of the production possibilities curve. In other words, it gets harder and harder to produce more of the same thing as you pull people from jobs they are better suited for. See Section 2-5 for more explanation.

2.1: Which fundamental economic question is most closely related to the issues of income distribution and poverty? a. The What to Produce question. b. The Why to Produce question. c. The How to Produce question. d. The For Whom to Produce question.

d. The For Whom to Produce question. -Correct. This is the decision concerning who actually receives the goods and services produced.

2.1: Which of the following best describes the three fundamental economic questions? a. What to produce, when to produce, and where to produce. b. What time to produce, what place to produce, and how to produce. c. What to produce, when to produce, and for whom to produce. d. What to produce, how to produce, and for whom to produce.

d. What to produce, how to produce, and for whom to produce. -Correct. These are the three fundamental economic questions

2.6: In Exhibit 3, the economy will experience the most future economic growth if it chooses what point now? a. A b. B. c. C. d. D. e. E.

d. D.

2.6: If a production possibilities curve (PPC) has capital on the vertical axis and consumer goods on the horizontal axis, which of the following is true? a. There is a tradeoff between emphasizing the production of capital today to benefit people today versus emphasizing the production of consumer goods today that will generate benefits in the future. b. Greater emphasis on the production of capital today leads to future inward shifts in the PPC, thus decreasing the wealth of people in the future. c. Greater emphasis on the production of consumer goods today leads to greater outward shifts in the PPC, thus increasing the wealth of people in the future. d. Greater emphasis on the production of capital today leads to greater outward shifts in the PPC, thus increasing the wealth of people in the future.

d. Greater emphasis on the production of capital today leads to greater outward shifts in the PPC, thus increasing the wealth of people in the future. Feedback Correct. Greater emphasis on the production of capital leads to larger outward shifts in the PPC.

Along a production possibilities curve, an increase in the production of one good can be accomplished only by decreasing the production of another good. increasing the production of another good. holding constant the production of another good. producing at a point on a corner of the curve.

decreasing the production of another good.

2.4: A production possibilities curve is drawn based on which of the following assumptions? a. Resources are fixed and fully employed, and technology advances at the rate of growth of the economy overall. b. Resources such as nonrenewable resources will decline, but labor remains fully employed, and technology is unchanged. c. Resources can vary, most resources experience times of unemployment, and technology advances, particularly during wartime. d. Resources such as labor and capital will grow, are fully employed, and technology is unchanged. e. None of the above answers are correct.

e. None of the above answers are correct. Correct. None of the answers state the correct answer—that resources are assumed to be fixed and fully employed, and technology is assumed to be unchanged.

The ability of an economy to produce greater levels of output is called positive economics. negative economics. economic growth. the law of specialization.

economic growth.

True or False: Economic growth allows an economy to produce more goods. To achieve this economic growth in the future, a nation must invest in more consumption now. Like every other decision, this choice involves a tradeoff. Thus, the nation must also reduce spending on capital goods now.

false

In the following table, calculate the hours for the "Hours of Study on Chemistry" column. Then fill in the "Expected Grade in Economics" and the "Expected Grade in Chemistry" columns. Hours of Study on Economics Hours of Study on Chemistry Expected Grade in Economics Expected Grade in Chemistry 12 0 Correct A Correct F Correct 9 3 Correct B Correct D Correct 6 6 Correct C Correct C Correct 3 9 Correct D Correct B Correct 0 12 Correct F Correct A Correct True or False: This production possibilities curve reflects the law of increasing opportunity costs.

false exp: A straight production possibilities curve *does not* reflect the law of increasing opportunity costs. The production possibilities curve model could assume that resources can be perfectly substituted and the opportunity cost will remain constant as it does in this particular case. Generally, however, resources are not equally well suited to producing all products. Therefore, it's common to experience increasing opportunity costs and a bowed-out production possibilities curve. See section: "The Law of Increasing Opportunity Costs."

A decision to use an undeveloped lot in Tokyo's financial district for an apartment building _______ opportunity cost than using a square mile in the desert for a gas station.

has a greater explanation: Remember that an opportunity cost is what you give up in order to make a decision. The undeveloped lot in a financial district has many other alternatives that would be useful there. Therefore the opportunity cost is high. The square mile in the desert may be bigger, but there are not that many things that would be useful in the desert, so we are not giving up as much. The opportunity costs are lower. See Section 2-2 for more explanation.

A nation can accelerate economic growth by

increasing its production of capital goods in excess of the capital being worn out in the production process

Any point inside the production possibilities curve is a (an) efficient point. unfeasible point. inefficient point. maximum output combination.

inefficient point.

Using a production possibilities curve, unemployment is represented by a point located near the middle of the curve. at the top corner of the curve. at the bottom corner of the curve. outside the curve. inside the curve.

inside the curve.

The principle that the opportunity cost increases as the production of one output expands is the law of increasing opportunity costs. law of demand. law of supply law of increasing returns to scale.

law of increasing opportunity costs.

Investment

means that an economy is producing and accumulating capital. Investment consists of factories, machines, and inventories (capital) produced in the present that are used to shift the production possibilities curve outward in the future.

Which words best complete the following sentence? A rational decision maker always chooses the option for which marginal benefit is marginal cost. less than equal to unrelated to more than

more than

On a production possibilities curve, a change from economic inefficiency to economic efficiency is obtained by movement along the curve. movement from a point outside the curve to a point on the curve. movement from a point inside the curve to a point on the curve. a change in the slope of the curve.

movement from a point inside the curve to a point on the curve.

The lack of perfect interchangeability between workers is the cause .

of increasing opportunity costs and the bowed-out shape of the production possibilities curve

You can see that "there is no such thing as a free lunch" from the production possibilities frontier because if you are_______________ the curve you must ____________ some of one good to produce another good. However, if you are_________ the curve, there may be a possibility of a "free lunch" in that you can get more of one good without giving up anything. If you did this, you would be starting from a point of_____________ .

on give up inside of inefficiency exp:When you are being inefficient, there is a possibility of getting more for "free." This could occur because growth has caused your previously efficient choice to become inefficient. When there is growth, you can have the "free lunch." See Sections 2-4 and 2-7 for more explanation.

Scarcity limits an economy to points

on or below its production possibilities curve.

Education and training that improve the skill of the labor force are represented on the production possibilities curve by a (an) movement along the curve. inward shift of the curve. outward shift of the curve. movement toward the curve from an exterior point.

outward shift of the curve.

Opportunity cost represents the best alternative sacrificed for a chosen alternative. has no relationship to the various alternatives that must be given up when a choice is made in the context of scarcity. represents the worst alternative sacrificed for a chosen alternative. represents all alternatives not chosen.

represents the best alternative sacrificed for a chosen alternative.

Assume that going to college has the following costs over the four years you spend to get a degree: Expense Cost Tuition $80,000 Room and board $40,000 Books $2,000 Opportunity cost of forgoing a job for four years $100,000 Miscellaneous expenses $10,000 If you expect to earn $300,000 more over your career by having a college degree, you______ get a college degree.

should explanation: We always want to compare the expected costs (including all opportunity costs) to the expected benefits of a decision. The total costs of college in this case are $232,000, and the total benefits are $300,000. If the benefits outweigh the costs, as they do here, then you should go through with the decision. In the case of getting a college degree, it is expensive, time consuming, and requires effort. Many people still decide to attend college because the benefit in their future earnings outweighs the large costs associated with college. See Section 2-3 for more explanation.

On a production possibilities curve, the opportunity cost of good X in terms of good Y is represented by the distance to the curve from the vertical axis. the distance to the curve from the horizontal axis. the movement along the curve. All of the answers above are correct.

the movement along the curve.

Opportunity cost is the purchase price of a good or service. value of leisure time plus out-of-pocket costs. best option given up as a result of choosing an alternative. undesirable sacrifice required to purchase a good.

undesirable sacrifice required to purchase a good.

In Exhibit 6, to move from U to B, the opportunity cost would be 4 units of consumption goods. would be 2 units of capital goods. would be zero. would be 5 units of capital goods. cannot be estimated.

would be zero.

Suppose a retailer promotes its store by advertising a drawing for a "free car." The money you pay for this car is _________ . When you take opportunity costs into account, this car really _________ free.

zero is not explanation: You are giving up your time and energy to be at the drawing. With that time, you could be working at a job or relaxing at the beach instead. Because you gave something up to get the "free" car, you are making a tradeoff. You are paying for the car with what you are giving up. This car is not truly free! See Section 2-2 for more explanation.

If a farmer adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, the farmer should add fertilizer if it costs less than $12.50 per pound. $20 per pound. $80 per pound. $100 per pound.

$20 per pound.

Three basic assumptions underlie the production possibilities curve model:

1. Fixed Resources. 2. Fully Employed Resources 3. Technology Unchanged.

A student who has one evening to prepare for two exams. On the following day has the following alternatives. Possibility Score in economics Score in accounting A 95 80 B 80 90 The opportunity cost of receiving 90, rather than 80, on the accounting exam is represented by how many points on the economics exam? 15 points. 80 points. 90 points. 10 points.

15 points.

The following table shows the production possibilities for pies and flower boxes. Fill in the opportunity cost (pies forgone) of producing the first through the fifth flower box. Combination Pies Flower Boxes Opportunity Cost A 30 0 B 26 1 C 21 2 D 15 3 E 8 4 F 0 5

4 5 6 7 8 explanation The number of pies forgone for each additional flower box is just the number of pies you had in the previous choice minus the amount of pies you have now. For example, to produce the fourth flower box you had 15 pies, but now you have only eight, so 15 - 8 = 7 pies is the opportunity cost of the fourth flower box. See Section 2-5 for more explanation.

production possibilities curve

A curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology.

In Exhibit 6, which of the following points on the production possibilities curve are efficient production points? A, B, C, U A, B, C, D, U E, U, W B, C, D, U A, B, C, D

A, B, C, D

n Exhibit 6, which of the following points on the production possibilities are full-employment production points? A, B, C, D A, B, C, D, U E, U, W B, C, D, U A, B, C, U

A, B, C, D

The following is a set of hypothetical production possibilities for a nation producing automobiles and beef. Combination Automobiles (thousands) Beef (thousands of tons) A 0 10 B 2 9 C 4 7 D 6 4 E 8 0 Plot these production possibilities data. A. The opportunity cost of the first 2,000 automobiles produced is______________thousand tons of beef. B. Between which points is the opportunity cost per thousand automobiles highest? C. Between which points is the opportunity cost per thousand tons of beef highest? D. Using your answers in the preceding parts, you can see that the opportunity cost of one thousand additional automobiles between points A and B _______ than the opportunity cost of one thousand additional automobiles between points D and E. This reflects _________________________________. E. Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, feasible, or infeasible. Check all that apply.

A. 1 B. D&E C. A&B D. is less/the law of increasing opportunity costs E. A-E- efficient and feasible F- inefficient and feasible G-Infeasible

marginal analysis

An examination of the effects of additions to or subtractions from a current situation.

Explain why scarcity forces individuals and society to incur opportunity costs. Give specific examples.

Answer Because the wants of individuals and society exceed the goods and services available to satisfy these desires, choices must be made. The consumption possibilities of an individual with a fixed income are limited, and as a result, additional consumption of one item necessarily precludes an expenditure on another next-best choice. The forgone alternative is called the opportunity cost, and this concept also applies to societal decisions. If society allocates resources to the production of guns, then those same resources cannot be used at the same time to make butter.

The following table shows the production possibilities for pies and flower boxes. Fill in the opportunity cost (pies forgone) of producing the first through the fifth flower box. Combination Pies Flower boxes Opportunity cost A 30 0 B 26 1 C 21 2 D 15 3 E 8 4 F 0 5

Answer Flower boxes Opportunity cost (pies forgone) 0 1 4 (30 − 26) 2 5 (26 − 21) 3 6 (21 − 15) 4 7 (15 − 8) 5 8 (8 − 0)

Interpret the phrases "There is no such thing as a free lunch" and "A free lunch is possible" in terms of the production possibilities curve.

Answer Movements along the curve are efficient points and conform to the well-known "free lunch" statement. However, points are exceptions because it is possible to produce more of one output without producing less of another output.

Explain verbally the statement "There is no such thing as a free lunch" in relation to scarce resources.

Answer Regardless of the price of a lunch, economic resources—land, labor, and capital—are used to produce the lunch. These scarce resources are no longer available to produce other goods and services.

Attending college is expensive, time consuming, and requires effort. So why do people decide to attend college?

Answer Using marginal analysis, students weigh the benefits of attending college against the costs. There is an incentive to attend college when the benefits (improved job opportunities, income, improvement, social life, and so on) outweigh the opportunity costs.

inefficient resource use is shown by

Any point inside the PPC curve means maximum output is not being produced.

From the information in Exhibit 6, which of the following points on the production are attainable with resources and technology currently available? A, B, C, E, U A, B, C, D, W E, U, W B, C, D, U A, B, C, E

B, C, D, U

Which of the following accurately explains why scarcity forces individuals and society to incur opportunity costs?

Because of scarcity, people must make choices, and each choice incurs a cost. Explanation: Scarcity means that no society has enough resources to produce all the goods and services necessary to satisfy all human wants. As a result, society is always confronted with the problem of making choices. Economists think of the alternative not chosen as the opportunity cost of the decision that was made. The opportunity cost is the value of the best alternative choice of the decision made. Therefore, scarcity forces individuals and society to incur opportunity costs.