Deck 2: Trade-Offs, Comparative Advantage, and the Market System

Question 1

Scarcity

A) is a bigger problem in market economies than in socialist economies.
B) can be eliminated by rationing products.
C) can be overcome by discovering new resources.
D) stems from the incompatibility between limited resources and unlimited desires.

Answer 1

stems from the incompatibility between limited resources and unlimited desires.

Question 2

In 2002, BMW made a tactical decision to use a robot to attach the gearbox to the engines of its vehicles instead of using two workers as it had done previously. The robot method had a higher cost but installed the gearbox in exactly the right position. In making this decision, BMW

A) faced a trade -off between higher cost and lower precision (in installing the gearbox in exactly the right position).
B) adopted a negative technological change because it replaced workers with robots.
C) eroded some of its competitiveness in the luxury car market because of its increased cost of production.
D) faced no trade -offs because the robot method increased efficiency.

Answer 2

faced a trade -off between higher cost and lower precision (in installing the gearbox in exactly the right position).

Question 3

The slope of a production possibilities frontier

A) is always constant.
B) has no economic relevance or meaning.
C) measures the opportunity cost of producing one more unit of a product.
D) is always varying.

Answer 3

measures the opportunity cost of producing one more unit of a product.

Question 4

Figure 2-4 shows various points on three different production possibilities frontiers for a nation.

-Refer to Figure 2 -4. A movement from X to Y

A) is the result of advancements in food production technology only, with no change in the technology for plastic production.
B) could occur because of an influx of immigrant labor.
C) could be due to a change in consumers' tastes and preferences.
D) is the result of advancements in plastic production technology only, with no change in food production technology.

Question 5

In a report made to the US Congress in 2001, the National Academy of Sciences cautioned that if fuel economy encourages the production of smaller and lighter cars, "some additional traffic fatalities would be expected." This statement suggests that

A) there is a trade -off between safety and fuel economy.
B) society should value safety more highly than fuel economy.
C) society should value fuel economy more highly than consumer safety because of the long -term environmental benefits generated by reduced gasoline use.
D) US auto manufacturers are more concerned about producing fuel -efficient cars to compete with their Japanese and South Korean rivals than about consumer safety.

Question 6

Mobica provides car furniture to Daimler and Toyota. When would Mobica factory managers face a trade -off between Daimler car furniture and Toyota car furniture?

A) If Mobica is operating at its PPF.
B) If Mobica has idle resources.
C) If Daimler and Toyota increase their demand on Mobica.
D) If Mobica is operating inside its PPF.

Question 7

Which of the following statements is NOT true about charitable giving in the Arab world?

A) Charitable giving is a fundamental feature of the Arab culture.
B) People in the Arab world used to give charitable donations on a person -to -person basis.
C) As more donations are directed to one project, fewer donations will be available to other projects.
D) All charities are related to human development programs such as helping people to start projects and become self -sufficient.

Question 8

-Refer to Table 2 -1. The Fruit Farm produces only apples and pears. The table above shows the maximum possible output combinations of the two fruits using all resources and currently available technology.
a. Graph The Fruit Farm's production possibilities frontier. Put apples on the horizontal axis and pears on the vertical axis. Be sure to identify the output combination points on your diagram.
b. Suppose The Fruit Farm is currently producing at point D. What is the opportunity cost of producing an additional 8,000 kilos of pears?
c. Suppose The Fruit Farm is currently producing at point D. What happens to the opportunity cost of producing more and more pears? Does it increase, decrease or remain constant? Explain your answer.
d. Suppose The Fruit Farm is currently producing at point G. What happens to the opportunity cost of producing more and more apples? Does it increase, decrease or remain constant? Explain your answer.
e. Suppose The Fruit Farm is plagued by a maggot infestation which destroys apple trees but not pears. Show in a graph what happens to its PPF.

Question 9

Table 2-3 shows the number of labor hours required to produce a digital camera and a kilo of wheat in China and South Korea.

-Refer to Table 2 -3. Does either China or South Korea have an absolute advantage and, if so, in which product?

A) South Korea has an absolute advantage in both products.
B) China has an absolute advantage in digital cameras.
C) South Korea has an absolute advantage in wheat.
D) China has an absolute advantage in wheat.

Question 10

-Refer to Table 2 -4. This table shows the number of labor hours required to produce an assembled car and a kilo of wheat in Egypt and Morocco.
a. Which country has an absolute advantage in the production of assembled cars?
b. Which country has an absolute advantage in the production of wheat?
c. What is Egypt's opportunity cost of producing one assembled car?
d. What is Morocco's opportunity cost of producing one assembled car?
e. What is Egypt's opportunity cost of producing one kilo of wheat?
f. What is Morocco's opportunity cost of producing one kilo of wheat?
g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce assembled cars?
h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce wheat?

Question 11

-Refer to Table 2-5. This table shows the number of labor hours required to produce an assembled car and a kilo of wheat in Egypt and Morocco.
a. If each country has a total of 9,000 labor hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Assembled cars" on the horizontal axis and "Wheat (kilos)" on the vertical axis. Be sure to identify the intercept values on your graphs.
b. Suppose each country allocates 60% of its labor hours to wheat production and 40% to the production of assembled cars. Complete Table 2-6 below to show each country's output of the two products.
c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label Egypt's consumption point "C" and Morocco's consumption point "K".
d. Suppose the two countries specialize and trade. Who should produce assembled cars and who should produce wheat? Explain your answer.
e. Complete Table 2-7 below to show each country's output with specialization.
f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much?
g. Suppose Egypt and Morocco agree to trade so that in exchange for 1,200 kilos of wheat, the exporter of wheat receives 48 cars. Complete Table 2.8 below to show each country's consumption bundle after trade.
h. Show the consumption points after trade on each country's production possibilities frontier. Label these points "B" for Egypt and "J" for Morocco.
i. Has trade made the two countries better off? Explain your answer.

Question 12

Suppose in Egypt, the opportunity cost of producing a motor engine is 4 auto bodies. In Morocco, the opportunity cost of producing a motor engine is 2 auto bodies.
a. What is the opportunity cost of producing an auto body for Egypt?
b. What is the opportunity cost of producing an auto body for Morocco?
c. Which country has a comparative advantage in the production of auto bodies?
d. Which country has a comparative advantage in the production of motor engines?

Question 13

The term "property rights" refers to

A) the right of a business not to have its assets confiscated by the government in the event that the business is accused of committing fraud.
B) the ability to exercise control over one's own resources within the confines of the law.
C) the physical possession of a house or any other property which the owner legally purchased.
D) the government's right to appropriate land from wealthy land owners to redistribute to peasants.

Question 14

In the 17th century Arab world there were over 300 guilds in Cairo that had authority to limit production of goods. Did this authority obstruct or improve the market mechanism and how?

A) It improved the market mechanism by making it more efficient because the guilds were able to quickly identify and rectify any market shortages and surpluses.
B) It obstructed the market mechanism because with one more party having to coordinate activities (the guilds) there were delays in getting the products to consumers.
C) It improved the market mechanism because the government's actions provided the correct set of signals to the market so that producers can adjust their output to better meet the needs of consumers.
D) It obstructed the market mechanism because the guild's actions prevented the forces of demand and supply from coordinating the self -interested decisions of producers and consumers.

Question 15

A tray of Baklawa is not a factor of production, but its ingredients - butter, wheat, and pistachio - are considered factors of production.

Question 16

When videos on YouTube contained material from television shows or movies, YouTube had to obtain permission from several people who held rights to the television show or movie, which could be a time-consuming process. YouTube's vice president for business development was quoted as saying, "It's almost like technology has pushed far beyond the business practices and the law, and now everything needs to kind of catch up." What do you think he meant by that statement?