Deck 2: The Economic Problem: Scarcity and Choice

Question 1

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

Answer 1

(1.) What will be produced? (2.) How will it be produced? (3.) Who will get what is produced?

Question 2

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

Answer 2

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.

Question 3

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.

Answer 3

It is likely that going to war during an economic boom is more costly because many men and women who join the military or are drafted will more than likely be leaving behind a productive job. The rest of the country will experience a permanent sacrifice in terms of all the goods and services that will not be produced by them. During a recession many men and women are without jobs so the opportunity cost of deploying them in war is lower.

Question 4

What is the opportunity cost of attending class today?

Question 5

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 6

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 7

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

Question 8

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 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?

Question 10

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 11

What are resources? Describe two different types of resources.

Question 12

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 13

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

Question 14

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."

Question 15

Explain the economic concept of opportunity cost.

Question 16

Explain Ricardo's theory of comparative advantage.

Question 17

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 18

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 19

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 20

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 21

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 22

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

Question 23

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 24

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 25

What is the difference between capital goods and consumer goods?

Question 26

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 27

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 28

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 29

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 30

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 31

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 32

In economic terminology, what is the meaning of investment?

Question 33

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 34

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

Question 35

Explain the difference between absolute advantage and comparative advantage.

Question 36

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 37

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 38

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 39

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 40

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 41

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 42

Why does the production possibility frontier have a negative slope?

Question 43

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

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

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

Question 46

What does a production possibility frontier represent?

Question 47

What is meant by the marginal rate of transformation?

Question 48

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."

Question 49

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 50

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