Deck 2: The Economic Problem: Scarcity and Choice

Question 1

Explain Ricardo's theory of comparative advantage.

Answer 1

Specialization and free trade will benefit all trading partners, including those that may be absolutely more efficient producers.

Question 2

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."

Answer 2

Assuming that the individual had no other reason to travel the 100 miles, the savings from the purchase of the car is less than $100. Travel costs should be taken into account, including the opportunity cost of time.

Question 3

Explain the economic concept of opportunity cost.

Answer 3

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

Question 4

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.

Question 5

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

Question 6

Explain why some researchers conclude that Americans are becoming more obese because of the existence of fast-food restaurants. If fast-food restaurants have been around for over 50 years why is the trend toward obesity only a recent one? Explain.

Question 7

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?

Question 8

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?

Question 9

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

Question 10

What are resources? Describe two different types of resources.

Question 11

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

Question 12

Suppose there is a new technological invention that will allow you to put any resource into a special black box and in an instant anything that you program it to produce will be produced? Does this invention end scarcity? Why or why not?

Question 13

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?

Question 14

What is the opportunity cost of attending class today?

Question 15

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?

Question 16

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?

Question 17

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

Question 18

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".

Question 19

Mexico has lower wages than the United States. Does this necessarily mean that it will have a comparative advantage in the production of everything compared to the United States?

Question 20

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.

Question 21

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?

Question 22

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?

Question 23

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.

Question 24

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."

Question 25

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?

Question 26

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.

Question 27

Suppose the CEO of a major corporation has five subsidiary companies. Only one of these companies is making better than the return on similar investments that the company could be making if it invested its financial capital outside the company. The CEO tells each of these subsidiary companies that the rate of return that they are earning is not acceptable and must rise to the level of these identified companies. He tells them if they can't come up with a plan in twelve months that their companies will be sold. If each of these companies was actually making money can you come up with an economic argument for why it is still rational for this CEO to sell them if they don't abide by his directive.

Question 28

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."

Question 29

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."

Question 30

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?

Question 31

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?

Question 32

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

Question 33

How does an individual know whether or not an investment in education is worthwhile?

Question 34

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?

Question 35

Explain the difference between absolute advantage and comparative advantage.

Question 36

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?

Question 37

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?

Question 38

In economic terminology, what is the meaning of investment?

Question 39

What is the difference between capital goods and consumer goods?

Question 40

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?

Question 41

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

Question 42

What is meant by the marginal rate of transformation?

Question 43

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest of fish off the coast of Virginia in answering the following questions.

Refer to Scenario 1. If this economy is currently producing 30 crabs and 40 fish how is it possible for it to produce more of both?

Question 44

Kathy and Amy paint pictures and do caricatures to sell to tourists. In one day, Kathy can either paint two pictures or do four caricatures. In one day, Amy can either paint three pictures or do three caricatures. For both Kathy and Amy, what is the opportunity cost of painting one picture? Who has the comparative advantage in painting pictures and who has the comparative advantage in doing caricatures? How might they be able to increase their total output?

Question 45

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest of fish off the coast of Virginia in answering the following questions.

Refer to Scenario 1. Assume this economy could either be at Point B or Point C. From which of these points is it more costly to produce more crabs? Explain your answer.

Question 46

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest of fish off the coast of Virginia in answering the following questions.

Refer to Scenario 1. Graph the production possibilities frontier and calculate the average opportunity cost of any of the first fifteen crabs produced.
The opportunity cost of the first fifteen crabs is of course the 10 fish given up (15C = 10F). Therefore, the opportunity cost of any one crab is 10/15 F or 2/3 of a fish.

Question 47

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. Graphically illustrate the production choices on a production possibilities frontier. Which country's PPF will likely move out farther in the future and why?

Question 48

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?

Question 49

Without drawing a graph explain what probably happened to the production possibility frontier during the Black Plague.

Question 50

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.

Question 51

Is it possible in the present to produce at a point that is outside the production possibilities frontier? Why or why not? With the passage of time how might a point outside the present production possibilities frontier be possible?

Question 52

What are the implications for economic growth for countries specializing in consumer goods rather than capital goods? Assume that they cannot trade what they produce.

Question 53

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest of fish off the coast of Virginia in answering the following questions.

Refer to Scenario 1. Explain how this economy might be able to produce 45 fish and 45 crabs?

Question 54

What can we say about the employment of resources if the economy is at a point on its production possibility frontier?

Question 55

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest of fish off the coast of Virginia in answering the following questions.

Refer to Scenario 1. What is the economic significance of 25 fish captured and 25
crabs captured?

Question 56

What does a production possibility frontier represent?

Question 57

Why does the production possibility frontier have a negative slope?

Question 58

Why might an economist argue that it could be damaging to the economic growth of a nation if it focused mostly on the production of consumer goods?

Question 59

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. Now assume that the countries are not alike, but that one is wealthier than the other in that it has more resources. Graphically illustrate this scenario using the production possibilities frontiers.

Question 60

What can we say about the employment of resources if the economy is at a point inside its production possibility frontier?

Question 61

If the law of increasing opportunity cost holds, can the production possibility frontier be a straight line?

Question 62

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 would be the impact of improvements in technology assuming that each country spends one-half of its resources on capital goods?

Question 63

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?

Question 64

Refer to Scenario 3. What would have to occur for three huts to be produced along with 100 coconuts?

Question 65

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. Draw the state's production possibilities frontier for the trade-off between schools and prisons.

Question 66

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. What is the maximum number of schools that can be built? The maximum number of prisons?

Question 67

Refer to the graph above. What is the opportunity cost of going from point A to point B? What is the opportunity cost of going from point B to point A?

Question 68

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.

Question 69

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.

Question 70

Refer to Scenario 3. What is the maximum potential increase in coconut production and maximum potential increase in hut production described in the previous question?

Question 71

Explain why the costs of most services like haircuts and college education have risen at a faster rate relative to the costs of manufactured goods?

Question 72

Refer to Scenario 3. Compute the opportunity cost of building two more huts in one day.

Question 73

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?

Question 74

Why does the opportunity cost of producing a good rise as more resources are devoted to producing that good?

Question 75

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 a prison falls to $1.5 million and that the price of school production rises to $2 million each. Draw the new production possibilities frontier. What is the new opportunity cost of producing one more prison?

Question 76

The table below represents five points on the production possibility frontier for the small country of Ponderosa, which produces only cowboy boots (measured in thousands of pairs) and saddles (measured in thousands):
What is the opportunity cost of moving from point A to point B? What is the opportunity cost of moving from point D to point C?

Question 77

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. What is the opportunity cost of building one more prison?

Question 78

Refer to Scenario 3. Assume that in one day, two huts were built and 75 coconuts were gathered. What does this situation depict?

Question 79

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):
If the economy is currently at point A, what is the opportunity cost of producing an additional 10,000 bushels of wheat? If the economy is currently at point B, what is the opportunity cost of producing an additional 10,000 bushels of wheat? What if the economy is currently at point D?

Question 80

Refer to Scenario 3. If half the workers build huts and half of the workers gather coconuts, what would be the production on the island?