Exam 2: The Economic Problem: Scarcity and Choice

At which time is the opportunity cost likely to be higher to go to war, during a recession or during an economic boom? Explain your answer fully.

Suppose you could measure the value in monetary terms for the following three things that you could do with your time this Friday evening: a) doing your homework - $50, 2) spending time with your friends - $40 or c) taking a nap - $30. Armed with only this information which activity has the lowest opportunity cost? Which two activities have the same opportunity cost? Based on what you have discovered what is the best use of your time and why?

What does a production possibility frontier represent?

The following table shows output per hour for Martha and Stewart who make gift baskets and potholders: What is the opportunity cost of a potholder for Martha? What is the opportunity cost of a potholder for Stewart? Who has an absolute advantage in producing potholders? Who has a comparative advantage in producing potholders?

What are resources? Describe two different types of resources.

If the marginal rate of transformation is constant what can be said of the shape of the production possibilities frontier and why?

Critically evaluate the following statement. "If a country can produce a good using fewer inputs than other country then that means that country enjoys a comparative advantage."

Critically evaluate the following statement. "If a country has an absolute advantage in the production of everything it necessarily follows that it will have a comparative advantage in the production of everything."

Define opportunity cost. Given the definition of opportunity cost, explain what is meant by the statement "There is no such thing as a free lunch."

Suppose that Rosie and Betty spend their free time making cakes and cookies. Is it possible for Betty to have an absolute advantage in the production of both cakes and cookies? Is it possible for Betty to have a comparative advantage in the production of both cakes and cookies? Explain.

What is the difference between capital goods and consumer goods?

Assume that a lawyer and a secretary have been working together for two years. The lawyer suddenly realizes that he prepares legal briefs and types faster than the secretary. Upon learning this he decides to let his secretary go. Why might this be a mistake?

Michael Jordan has more athletic ability than most individuals. Thus, he is more productive at most tasks involving physical skill. Explain why then, it is more efficient for Michael Jordan to pay someone else to mow his lawn.

Comment on the following statement: "I decided to buy a car from a dealer in a town 100 miles away because he was offering a price that was $100 lower than the dealer in my hometown. Therefore, I saved $100."

In economic terminology, what is the meaning of investment?

What critical resource is likely to be the culprit for the impending doom of Social Security regarding tax collection? Explain.

Suppose that there are two goods that a small island nation can produce - coconuts and breadfruit. If the inputs for both goods are perfectly interchangeable and there is never a rise or fall in opportunity cost explain what the production possibilities frontier should look like and why.

Suppose you have saved $300. You can spend it on a new stereo or on a weekend skiing trip. What is the opportunity cost of going on the skiing trip?

Suppose that a local government decides to provide more funds to the local police department in order for the department to hire additional police officers. Is there an opportunity cost of this action? If so, how would you measure it?

List the three basic economic questions that all societies must answer.