Exam 2: The Economic Problem: Scarcity and Choice

Refer to the information provided in Scenario 4 below to answer the questions that follow. SCENARIO 4: Suppose that a state needs to build both prisons and schools with a budget limited to 10 million dollars. Schools cost $1 million each to build and prisons cost $2 million each to build. -Refer to Scenario 4. Assume that the price of prison production falls to $1.5 million each. Draw the new production possibilities frontier. In addition, what is the new opportunity cost of producing one more prison?

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.

What are resources? Describe two different types of resources.

Why is microeconomic theory often referred to as price theory?

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?

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."

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

Refer to the information provided in Scenario 2 below to answer the questions that follow. SCENARIO 2: Assume that two countries are the same in every way except that one allocated more of its resources to the production of capital goods as opposed to consumer goods. -Refer to Scenario 2. What happens to the relative income distribution between the two countries under the conditions in the previous question? Explain.

Refer to the information provided in Scenario 4 below to answer the questions that follow. SCENARIO 4: Suppose that a state needs to build both prisons and schools with a budget limited to 10 million dollars. Schools cost $1 million each to build and prisons cost $2 million each to build. -Refer to Scenario 4. Assume that the state originally spent one-half of its budget on schools and one-half on prisons. What was the production of schools and prisons? Could the same number be achieved after the price of producing prisons falls to $1.5 million and the price of producing schools rises to $2 million? Explain.

What is a laissez-faire economy?

What happens to a country's production possibility frontier if it experiences a natural disaster such as a hurricane or an earthquake? Explain.

Explain how it is possible for a recently retired postal worker to be more wealthy than a rookie professional football player even though it is widely recognized that football players earn more than postal workers.

What is the economic problem? How does a command economy solve the economic problem?

What is a command economy?

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?

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."

What is the economic problem?

-The table above represents five points on the production possibility frontier for the small country of Baca, which produces only rugs (measured in thousands) and wheat (measured in thousands of bushels): Does the production possibility frontier demonstrate the law of increasing opportunity cost? How can you tell?

Explain three of the shortcomings of the free-enterprise system.

What is meant by the term economic growth?