Exam 2: The Economic Problem: Scarcity and Choice

The following table shows output per hour for Fred and Barney who mow lawns and trim hedges: What is the opportunity cost of mowing a lawn for Fred? What is the opportunity cost of trimming a hedge for Fred? Who has a comparative advantage in mowing lawns? How can you tell?

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Question 1

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The opportunity cost of mowing a lawn for Fred is 4 hedges trimmed. The opportunity cost of a trimming a hedge for Fred is 1/4 of a lawn mowed. Fred has a comparative advantage in mowing lawns. His opportunity cost of mowing a lawn is 4 hedges trimmed and Barney's opportunity cost of mowing a lawn is 6 hedges trimmed.

Explain the economic concept of opportunity cost.

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Question 2

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The opportunity cost of something is the best alternative that we give up when we make a choice or a decision.

Critically evaluate the following statement. "Only poor nations face scarcity. Rich nations have everything they need and have therefore conquered scarcity."

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Question 3

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Rich nations simply face different choices than do poor nations. The existence of choices naturally presumes that there is scarcity. Since all resources are limited there is only so many goods and services that can be produced by any nation whether it is poor or rich.

What is the opportunity cost of producing capital goods such as a new road?

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Question 4

What is meant by the marginal rate of transformation?

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Question 5

Suppose that you have saved $100. You can spend it today or you can put it in your savings account for a year and earn 5% interest. What is the opportunity cost of spending the money today?

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Question 6

Assume that two countries are considering trading with each other for the first time. Also assume that one of the countries has an absolute disadvantage in producing everything compared to the other country. How would it still be possible for these two nations to benefit from trade with each other?

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Question 7

Use a graph and comment on the following statement: "If an economy is producing at a point on its production possibilities frontier, it could possibly produce more of one good without giving up any of the other."

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Question 8

Explain the difference between absolute advantage and comparative advantage.

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Question 9

Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not?

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Question 10

The following table shows output per hour for Martha and Stewart who make gift baskets and potholders: What is the opportunity cost of a gift basket for Martha? What is the opportunity cost of a gift basket for Stewart? Who has a comparative advantage in producing gift baskets? How can you tell?

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Question 11

Explain how it might be possible to discuss costs of production of a good or service without using monetary values.

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Question 12

The following table shows output per hour for Mexico and Canada, two countries that produce beer and T-shirts: What is the opportunity cost of a bottle of beer for Mexico? What is the opportunity cost of a T-shirt for Mexico? Who has a comparative advantage in producing beer? How can you tell?

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Question 13

Assume that yields on bonds (rate of return) begin to fall while the stock market is booming, what should we see happen to the demand and price of stocks and why? What can we say about the opportunity cost of holding on to bonds in this situation?

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Question 14

Papa Ray owns a pizzeria. He is more efficient at making pizza than anyone he could hire. Does this mean that he should make all of the pizzas himself?

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Question 15

Why does the production possibility frontier have a negative slope?

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Question 16

Evaluate the following statement. "The nation of Berundi has an absolute disadvantage in the production of everything compared to the United States. Therefore, the United States will have no reason to trade with Berundi".

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Question 17

Suppose that the opportunity cost of a student's time is greater when he studies than when he works. What mistake is he making and why?

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Question 18

Assume that there were decreasing opportunity costs of production in an island economy that only produced two goods. What would the shape of the production possibilities frontier look like and why?

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Question 19

If a comparative advantage implies that a country can produce a product at a lower opportunity cost than another country then why do we see two countries often trading the same goods? For instance, for most agricultural products the U.S. has a comparative advantage. Japan, one of America's largest trading partners has a comparative advantage in the production of most economy cars. Explain what is going on here when we still see the U.S. exporting cars to Japan and the U.S. importing some foods from Japan.

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Question 20

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The following table shows output per hour for Fred and Barney who mow lawns and trim hedges: What is the opportunity cost of mowing a lawn for Fred? What is the opportunity cost of trimming a hedge for Fred? Who has a comparative advantage in mowing lawns? How can you tell?

Explain the economic concept of opportunity cost.

Critically evaluate the following statement. "Only poor nations face scarcity. Rich nations have everything they need and have therefore conquered scarcity."

What is the opportunity cost of producing capital goods such as a new road?

What is meant by the marginal rate of transformation?

Suppose that you have saved $100. You can spend it today or you can put it in your savings account for a year and earn 5% interest. What is the opportunity cost of spending the money today?

Assume that two countries are considering trading with each other for the first time. Also assume that one of the countries has an absolute disadvantage in producing everything compared to the other country. How would it still be possible for these two nations to benefit from trade with each other?

Use a graph and comment on the following statement: "If an economy is producing at a point on its production possibilities frontier, it could possibly produce more of one good without giving up any of the other."

Explain the difference between absolute advantage and comparative advantage.

Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not?

The following table shows output per hour for Martha and Stewart who make gift baskets and potholders: What is the opportunity cost of a gift basket for Martha? What is the opportunity cost of a gift basket for Stewart? Who has a comparative advantage in producing gift baskets? How can you tell?

Explain how it might be possible to discuss costs of production of a good or service without using monetary values.

The following table shows output per hour for Mexico and Canada, two countries that produce beer and T-shirts: What is the opportunity cost of a bottle of beer for Mexico? What is the opportunity cost of a T-shirt for Mexico? Who has a comparative advantage in producing beer? How can you tell?

Assume that yields on bonds (rate of return) begin to fall while the stock market is booming, what should we see happen to the demand and price of stocks and why? What can we say about the opportunity cost of holding on to bonds in this situation?

Papa Ray owns a pizzeria. He is more efficient at making pizza than anyone he could hire. Does this mean that he should make all of the pizzas himself?

Why does the production possibility frontier have a negative slope?

Evaluate the following statement. "The nation of Berundi has an absolute disadvantage in the production of everything compared to the United States. Therefore, the United States will have no reason to trade with Berundi".

Suppose that the opportunity cost of a student's time is greater when he studies than when he works. What mistake is he making and why?

Assume that there were decreasing opportunity costs of production in an island economy that only produced two goods. What would the shape of the production possibilities frontier look like and why?

The Scope and Method of Economics

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Monopolistic Competition

Externalities, Public Goods, and Social Choice

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