Chapter 2: Trade-offs, Comparative Advantage, and the Market System

In his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations," Adam Smith notes that specialization increases productivity. Which of the following was the cause of this phenomenon?

"The division of labor."

Using information in the previous table, what is country A's opportunity cost of producing 1 unit of clothing?

2 units of food

The outward shift of the production possibilities frontier from point A to point B in the above graph would most likely be caused by...

a technological advance that affects both the production of automobiles and aircraft carriers

According to the theory of comparative advantage, specialization and free trade will benefit...

all trading partners who specialize in goods where they have comparative advantage

Ms. Boulware is the best lawyer and the best secretary in town. She has...

an absolute advantage in both jobs

In what type of economy does the government decide how most economic resources will be allocated?

centrally planned economy

In the circular flow model of the economy, __________ are the suppliers of goods and services.

firms

In the previous circular flow diagram, which arrow shows the flow of goods and services?

firms --> product markets --> households

If a country has a comparative advantage in the production of a good, then that country...

has a lower opportunity cost in the production of that good

Contracts, insurance, patents and accounting rules are...

inventions that make a market work better

Adam Smith observed that people pursuing their own self-interest in a free market will actually result in the best interest of society as if these actions were guided by a(n)...

invisible hand

Refer to the previous graph. Which of the following best represents the situation in which BMW must face a trade-off between producing SUVs and producing hybrids?

moving from point B to point C

What is the name given to the highest-valued alternative that must be given up to engage in any activity?

opportunity cost

When nations specialize in their comparative advantage and engage in trade...

overall standards of living increase

Absolute advantage is the ability of an individual, firm, or country to...

produce more of a good or service than competitors using the same amount of resources

In the circular flow model, which of the following refers to markets where goods such as computers or services such as medical treatment are offered?

product markets

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the _____ the payoff to devoting additional resources to that activity.

smaller

The role of the entrepreneur always involves...

taking risks

Which of the following is critical to the success of the market system?

to allow individuals or firms to have exclusive use of their property

What are copyrights designed to accomplish?

to protect intellectual property rights

A product produced in a foreign country and purchased by residents of the home country is called...

an import

In the United States, property rights...

are guaranteed by two amendments to the U.S. Constitution

In the above graph, which of the following combinations is unattainable with the current resources available in this country?

combination G

In the graphs shown, which country has a comparative advantage in the production of shirts?

country B

In the above graph, which of the following combinations of pies and cakes is unattainable given the existing resources?

four cakes and seven pies