Opportunity cost and the PPC

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Opportunity cost is best described by which of the following statements?

The value of the next best option given up when making a decision. The phrase "opportunity cost is the opportunity lost" captures the idea of opportunity cost. It is what could have been done with time or other resources instead of what was actually done.

Which of the following statements best captures the tradeoff between capital goods and consumption goods in economic growth?

A society must balance the need for current consumption with the ability to consume more in the future. In order to produce more goods and services in the future, a society must devote some of its current resources to the production of capital goods.

Which of the following is an accurate representation of economic growth?

An increase in both the potential and actual level of output of goods and services over time. A sustained increase in output over time is economic growth.

A production possibilities curve. Which of the following best explains why this PPC is bowed outward from the origin?

The resources used to produce scooters and ice cream are not interchangeable. When resources needed to produce two goods are not interchangeable, the resources to make one good get more and more scarce as you make more of that good. This increases the opportunity cost of making that good, resulting in a bowed out PPC.

Xam's production possibilities. Which of the following movements would represent economic growth?

From Z to V. This movement represents economic growth because the economy is now able to make more goods and services, as illustrated by the rotation of the PPC.

Production possibilities for Eoth. What does the shape of the PPC say about the production of these two goods?

Goods L and M require very different resources to produce. The bowed shape of the PPC here signifies that there are increasing opportunity costs which occurs when there are different uses of resources to produce two different goods.

A production possibilities curve. The PPC shown is bowed out from the origin. What does the shape of this PPC indicate about how opportunity cost changes as more of one good is produced?

Increasing opportunity cost. The first scooter (from 1 to 2 scooters) costs only a fraction of a gallon of ice cream, as output falls from 8 gallons to just under 8 gallons. The ninth scooter (from 8 to 9) costs more than three gallons of ice cream (as output falls from 3.5 to 0). As output of scooters increased, the opportunity cost of additional scooters increases.

How does the opportunity cost of Good R change as output of S increases?

It decreases. To produce the first unit of Good S, about 4 units of Good R are given up. For the second unit of Good S only about 2 units of Good R are given up. Going from 9 to 10 units of Good S costs almost no units of Good R. This illustrates decreasing opportunity costs, as illustrated by a PPC bowed inward toward the origin.

Which of the following would NOT be part of the opportunity costs of going to college?

Money spent on clothes. You would have had to buy clothes whether you attended college or not. All the other costs could have been avoided had you decided not to attend college.

A production possibilities curve. What statement explains why the PPC for ice cream and frozen yogurt is a straight line instead of a curve?

The shape of the PPC signifies that the resources needed to produce the two goods are interchangeable. The same resources are needed to produce the two goods, so the opportunity cost is constant as output of each good increases. This makes the PPC a straight line.

A PPC with points illustrating different combinations of production. Based on Alex's PPC, which of the following statements best describes what we can say about how he should split his time?

We cannot tell how he should split his time. The production possibilities curve only shows what can be produced, not what should be produced. That would depend on Alex's preferences.

Which of the following concepts can be modeled using a PPC?

When all resources are being used, making more of one good means making less of the other good. The downward slope of the curve represents tradeoffs. Producing more of one of the goods will require shifting resources away from one good and toward the other good.

Xam's production possibilities. Which of the following statements about the economic growth in this PPC are true?

Xam now has more resources or technology available to produce more fast cars, but not fruit smoothies. If the country devotes all of its resources to making fast cars, it can make more fast cars, but if it devotes all of its resource to making smoothies the amount they can make hasn't changed, which means only the resources or technology for making cars have increased.


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