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Macroeconomics – Testbank 2, (Hubbard/O’Brien)Chapter 2 Trade offs, Comparative Advantage, and the Market System

1)

A production possibilities frontier shows the A)

the maximum attainable combinations of two goods that can be produced with the available resources.

B)

combinations of two goods that consumers desire most. C)

maximum output of two goods that can be produced with an unlimited quantity of resources.

D)

demand for two goods. Answer:

A Diff: 1

Type: MC Topic: Production Possibilities Frontier Skill: Definition

2)

Being on the production possibilities frontier implies that more of one good can be produced only by

A)

decreasing the quantity of the other good produced. B)

increasing the quantity of the other good produced. C)

lowering the price of the good. D)

raising the price of the good. Answer:

1

A Diff: 1

Type: MC Topic: Production Possibilities Frontier Skill: Conceptual

3)

The production possibilities frontier illustrates which of the following economic principles? A)

opportunity cost B)

trade-offs C)

technical efficiency in production D)

all of the above Answer:

D Diff: 2


4)

An output combination is technically efficient if A)

it is possible to produce more of all goods. B)

it is possible to produce more of one good without producing less of another. C)

it is not possible to produce more of one good without producing less of another. D)

it is not possible to produce more of one good at any cost. Answer:

2

C Diff: 1

Type: MC Topic: Productive Efficiency Skill: Conceptual

3

5)

Suppose in an economy some resources are not utilized in their most productive use. If society decides that it wants more of one good,

A)

it will have to increase the quantity of resources in the economy. B)

it will have to give up production and consumption of some other good. C)

it can only do so if technology advances. D)

it can achieve this without giving up another good by employing the under-utilized resources.

Answer:

D Diff: 2


6)

A country that produces a maximum possible combination of two goods using all of the resources available in the economy

A)

is operating on its production possibilities frontier. B)

is maximizing its opportunity cost. C)

has eliminated scarcity. D)

has achieved all of the above. Answer:

A Diff: 1

Type: MC

4

Topic: Production Possibilities Frontier Skill: Conceptual

7)

In the production possibilities frontier framework, unemployment is represented by A)

an inward shift of the curve. B)

a point located inside the curve. C)

a point located outside the curve. D)

a point located on the curve Answer:

B Diff: 1


8)

Which of the following will not cause the production possibilities frontier (PPF) to shift? A)

an improvement in the technology available for production B)

an increase in the unemployment rate C)

an increase in the amount of capital available for production D)

All of the above will cause the PPF to shift. Answer:

B Diff: 2

Type: MC

5

Topic: Production Possibilities Frontier Skill: Conceptual

6

9)

The production possibilities frontier shifts when all of the following events occur except A)

advancements in technology. B)

an increase in labor’s productivity. C)

an increase in consumer wealth. D)

an earthquake that claims many human lives and destroys part of a nation’s infrastructure. Answer:

C Diff: 1


10)

Which of the following would not shift a nation’s production possibilities frontier? A)

a liberal immigration policy that welcomes foreign labor B)

an increase in a nation’s capital stock C)

discovery of oil, a vital input in the production process D)

an increase in the general price level. Answer:

D Diff: 1


7

11)

Consider the Production Possibilities model in which a country produces two goods, capital goods and consumption goods. Economic growth is depicted by

A)

a movement along a production possibilities frontier toward capital goods. B)

an outward shift of the production possibilities frontier. C)

an inward shift of the production possibilities frontier. D)

a movement from inside the frontier toward a point on the frontier Answer:

B Diff: 1

Type: MC Topic: Economic Growth Skill: Conceptual

8

The figure shows the production possibilities frontier for a country that produces two goods, wheat and trucks.

12)

Refer to the figure above. Suppose the economy is currently at point D. What is the opportunity

cost of producing an additional 100 trucks? A)

25 tons of wheat B)

80 tons of wheat C)

100 tons of wheat D)

180 tons of wheat Answer:

B Diff: 1


13)

Refer to the figure above. Suppose the economy is producing 180 tons of wheat and 300

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trucks. This implies that

A)

the economy is operating efficiently. B)

the economy is not producing as much as it could. C)

economic growth would help the economy move to its production possibilities frontier. D)

the demand for trucks is very low. Answer:

A Diff: 1


10

14)

Refer to the figure above. The bowed out shape of the production possibilities frontier demonstrates that

A)

trucks cost more than wheat. B)

wheat costs more than trucks. C)

the opportunity cost of additional trucks increases as the economy produces more and more of them.

D)

the opportunity cost of additional trucks remains constant as the economy produces more and more of them.

Answer:

C Diff: 1


15)

Refer to the figure above. The choice of producing at point C over point D for this economy would be based on

A)

technical efficiency. B)

where marginal opportunity cost is at the lowest. C)

the preferences of the consumers. D)

full employment of resources. Answer:

C Diff: 1

11


16)

Refer to the figure above. A recession which increases unemployment nationwide A)

shifts the production possibilities frontier inwards B)

causes a movement downward along the frontier, example from point “C” to D”. C)

moves the economy from a point on the frontier to a point inside the frontier. D)

causes a movement upwards along the frontier, example from point “C” to “A”. Answer:

C Diff: 1


12

17)

Refer to the figure above. The discovery of a new technology used only in the production of cloth can be shown by which movement?

A)

from the frontier A-B to the frontier C-D in Graph A B)

from the frontier C-D to the frontier A-B in Graph A C)

from the frontier A-B to the frontier A-C in Graph B D)

from the frontier A-C to the frontier A-B in Graph B Answer:

C Diff: 1


18)

Refer to the figure above. Jim Osberg grows tobacco and millet on his land. A portion of hisland is more suitable for cultivating tobacco than millet and the other portion is more

suitable

13

for growing millet. than tobacco. Which of the graphs above represents his production possibilities frontier?

A)

Graph A B)

Graph B C)

Neither graph A nor graph B represent his production possibilities frontier. D)

Either graph A or Graph B can represent his production possibilities frontier. Answer:

A Diff: 1


19)

Refer to the figure above. The movement from PPF1 to PPF2 indicates A)

destruction of a nation's capital stock B)

reallocating resources in a more efficient way. C)

14

an increase in demand for both goods. D)

economic growth. Answer:

D Diff: 1


20)

Refer to the figure above. If the economy is on PPF1, it A)

will move to PPF2 more quickly if it chooses point J. B)

will move to PPF2 more quickly if it chooses point K. C)

will find that choosing either point J or K will lead to the same growth rate. D)

will find point J more desirable because there will be more consumption goods. Answer:

B Diff: 2


21)

Refer to the figure above. Technical efficiency is achieved at what output combinations? A)

15

A, B, and H B)

C, D and G C)

A, C and F D)

H, D and E Answer:

C Diff: 1


22)

Refer to the figure above. Which output combination is inefficient? A)

A, G and F B)

G and H C)

G D)

H Answer:

C Diff: 1


23)

Refer to the figure above. Which output combination is unattainable with current resources?

A)

16

A, G and F B)

G and H C)

G D)

H Answer:

D Diff: 1


24)

Refer to the figure above. Which of the following could cause a movement along the frontier, say from point B to point D?

A)

increasing marginal opportunity costs B)

a change in the combination of goods produced C)

a technological breakthrough that improves overall efficiency D)

a reduction in the size of the labor force Answer:

B Diff: 1


25)

Refer to the figure above. Suppose the economy is operating at point G. A movement toward B

A)

17

can be achieved without giving up any good X. B)

requires giving up some of good X. C)

is possible only if there is an increase in resources. D)

is possible only if there is an outward shift of the production possibilities frontier. Answer:

A Diff: 1

Type: MC Topic: Trade-off Skill: Conceptual

18

26)

After the tsunami in December 2004, which devastated lives and property in some southeast Asian countries, several non-profit organizations in the United States reported a decrease in charitable contributions to aid programs in the United States. One commentator observed, "The milk of human kindness is probably flowing at the usual rate in the United States. It's just getting channeled in different directions." What economic principle does this observation demonstrate?

A)

trade-offs B)

the principle of increasing marginal opportunity cost C)

property rights D)

the principle of constant marginal opportunity cost Answer:

A Diff: 1

Type: MC Topic: Trade-off Skill: Conceptual

27)

Absolute advantage is the ability of an economic agent to A)

produce more of a product than its competitors using the same amount of resources. B)

produce a product at a lower opportunity cost than other producers. C)

produce a product using maximum resources. D)

purchase more products than others. Answer:

A Diff: 1

19

Type: MC Topic: Absolute Advantage Skill: Definition

28)

Comparative advantage in the production of a good occurs A)

when an economy can produce that good using fewer resources than its competitors. B)

when an economy can produce that good at a greater opportunity cost than its competitors. C)

when an economy can produce that good at a lower opportunity cost than its competitors. D)

only if an economy has an absolute advantage in the production of that good. Answer:

C Diff: 1

Type: MC Topic: Comparative Advantage Skill: Definition

29)

Dervla and Craig are part of a knitting circle on campus. If it takes Dervla 4 hours to knit one pair of socks and it takes Craig 3 hours to knit one pair of socks, then

A)

Dervla has a comparative advantage in knitting socks. B)

Craig has a comparative advantage in knitting socks. C)

Dervla has an absolute advantage in knitting socks. D)

Craig has an absolute advantage in knitting socks. Answer:

D

20

Diff: 1


21

30)

It takes Rosie, a seamstress , 3/4 hour to hem a pair of pants and 1 hour to hem a skirt. What is the opportunity cost of hemming a pair of pants in terms of a skirt?

A)

3/4 of a skirt B)

1 1/3 skirt C)

1 skirt D)

1 1/4 skirt Answer:

A Diff: 2

Type: MC Topic: Opportunity Cost Skill: Conceptual

31)

In her spare time, Megan makes soaps and candles. If she can make 4 bars of soap in one hour or 12 candles, what is the opportunity cost of a bar of soap?

A)

3 candles B)

4 candles C)

12 candles D)

16 candles Answer:

A Diff: 1

Type: MC Topic: Opportunity Cost

22

Skill: Conceptual

32)

If labor in Mauritius is less productive than labor in the U.S. in all areas of production, A)

Mauritius can benefit from trade but the U.S. cannot. B)

Mauritius will not have a comparative advantage in any good. C)

neither nation can benefit from trade. D)

both nations can still benefit from trade. Answer:

D Diff: 2

Type: MC Topic: Comparative Advantage Skill: Conceptual

33)

If labor in the U.S. is more productive than labor in Germany in all areas of production, A)

then the U.S. has a comparative advantage in the production of all goods and services. B)

then the U.S. has an absolute advantage in the production of all goods and services. C)

then the U.S. should not trade with Germany. D)


B Diff: 2

Type: MC Topic: Absolute Advantage

23

Skill: Conceptual

24

34)

Resources are used more efficiently if economic agents specialize in goods for which they have

A)

a higher opportunity cost. B)

an absolute advantage in production. C)

a comparative advantage in production. D)

None of the above. Economic agents should learn to be self-sufficient Answer:

C Diff: 1


35)

Which of the following is not a basis of comparative advantage? A)

a country' s endowment of natural resources B)

a country's capital stock C)

a country's technological knowledge D)

regulations against outsourcing to protect domestic industries Answer:

D Diff: 1


25

36)

Increasing marginal opportunity cost along a bowed out production possibilities frontier occurs because

A)

of increasing bureaucracy. B)

of the scarcity of resources C)

of inefficient production methods. D)

some factors of production are not equally suited to producing both goods or services. Answer:

D Diff: 1

Type: MC Topic: Increasing marginal opportunity cost Skill: Conceptual

37)

Which of the following statements is false? A)

A country may have an absolute advantage in everything it produces but not a comparative advantage in everything it produces.

B)

Trade based on the principle of comparative advantage enables a country to produceoutside its production possibilities frontier.

C)

Trade based on the principle of comparative advantage enables a country to consume outside its production possibilities frontier.

D)

Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.

Answer:

B 26

Diff: 3

Type: MC Topic: Trade Skill: Analytical

27

38)

Economists argue that A)

efficiency in international trade requires countries to produce those goods in which they have an absolute advantage.

B)

efficiency in international trade requires countries to produce those goods in which they have a comparative advantage.

C)

efficiency in international trade requires that countries which have an absolute advantage in the production of all goods become self-sufficient.

D)

that countries produce goods that have the highest opportunity cost. Answer:

B Diff: 2

Type: MC Topic: Trade Skill: Analytical

39)

Consider a simple two-good, two-country world. By specializing in the production of a good in which opportunity costs is lower and then trading,

A)

each country will end up being self sufficient. B)

each country will end up with more than if each tried to produce both goods. C)

each country will end up with less than if each tried to produce both goods. D)

one country will have a trade deficit and the other a trade surplus. Answer:

B Diff: 1

28

Type: MC Topic: Trade Skill: Conceptual

The figure below shows the production possibilities frontiers for Egdon and Budmouth. Each country produces two goods, tractors and wheat and each has the same amount of resources.

40)

Refer to the figure above. What is the opportunity cost of 1 tractor in Egdon? A)

1/3 million tons of wheat B)

3 million tons of wheat C)

50 million tons of wheat D)

15-and -1/3 million tons of wheat Answer:

A Diff: 1


29

41)

Refer to the figure above. What is the opportunity cost of 1 tractor in Budmouth? A)

1/4 million tons of wheat B)

4 million tons of wheat C)

30 million tons of wheat D)

12 million tons of wheat Answer:

A Diff: 1


42)

Refer to the figure above. Assume that the countries do not engage in trade. If Budmouth devotes half its resources to the production of tractors and half to the production of wheat. Which point in Panel B of Figure 2-6 represents Budmouth's consumption bundle?

A)

point A B)

point B C)

point C D)

point D Answer:

B Diff: 1

Type: MC Topic: Trade

30

Skill: Conceptual

43)

Refer to the figure above. Assume that the countries do not trade. If Egdon produces and consumes at point E in Panel A and Budmouth produces at point B in panel B, what is the total output of tractors and wheat for the two countries

A)

120 tractors and 45 million tons of wheat B)

270 tractors and 80 million tons of wheat C)

120 tractors and 50 million tons of wheat D)

135 tractors and 40 million tons of wheat Answer:

A Diff: 2


44)

Refer to the figure above. Suppose each country specializes in one good and then engage in trade. Which country should specialize in tractors?

A)

Egdon B)

Budmouth C)

Neither should specialize. D)

Both should specialize. Answer:

B

31

Diff: 2


32

45)

Refer to the figure above. Suppose each country specializes in one good and then engage in trade. Which country should specialize in wheat production?

A)

Egdon B)

Budmouth C)

Neither should specialize. D)

Both should specialize. Answer:

A Diff: 2


46)

Refer to the figure above. Suppose each country specializes in the good in which it has a comparative advantage. What is the total output of tractors and wheat?

A)

150 tractors and 30 million tons of wheat B)

270 tractors and 80 million tons of wheat C)

120 tractors and 50 million tons of wheat D)

135 tractors and 40 million tons of wheat Answer:

C Diff: 2

Type: MC Topic: Trade

33

Skill: Conceptual

47)

Refer to the figure above. What does point F in panel A represent? A)

Egdon's consumption bundle if it trades with Budmouth. B)

Egdon's conumption bundle if it does not trade but allocates more resources to tractor production.

C)

Egdon's output if it improves the quality of its resources. D)

Egdon's output if it uses more efficient technology. Answer:

A Diff: 1


48)

Refer to the figure above. What does point D in panel B represent? A)

Budmouth's production if it specializes in one good and trades B)

Budmouth's production before trade C)

Budmouth's consumption after trade D)

Budmouth's production if it does not trade Answer:

A Diff: 1

Type: MC

34

Topic: Trade Skill: Conceptual

35

49)

Consumer goods and services such as automobiles and haircuts are traded in A)

factor markets. B)

product markets. C)

labor markets. D)

commerce markets. Answer:

B Diff: 1

Type: MC Topic: Product market Skill: Definition

50)

Factors of production such as labor and capital are traded in A)

factor markets. B)

product markets. C)

speculative markets. D)

commerce markets. Answer:

A Diff: 1

Type: MC Topic: Factor markets Skill: Definition

36

51)

A circular flow diagram A)

illustrates the concept of scarcity. B)

illustrates how money circulates in the economy. C)

shows the interaction between the private sector and the public sector. D)

explains how the economy is organized in terms of its two critical economic activities: production and consumption.

Answer:

D Diff: 1

Type: MC Topic: Circular flow diagram Skill: Conceptual

52)

Which of the following is not an example of spending on goods and services in the circular flow model?

A)

salaries paid to administrative assistants at your college B)

your sister's purchase of a Toyota Prius C)

a consumer’s expenditure on an iPod D)

your purchase of a hamburger at Wendy's Answer:

A Diff: 2

Type: MC Topic: Circular flow diagram

37

Skill: Conceptual

38

53)

Which of the following is not an example of spending on factors of production in the circular flow model?

A)

wages and salaries B)

interest paid on funds borrowed to purchase capital C)

a consumer’s expenditure on a haircut D)

a bank's rent paid for its premises Answer:

C Diff: 2


54)

In a circular-flow diagram, A)

resources flow from households to firms, and goods and services flow from firms to households.

B)

services flow from households to firms and goods flow from firms to households. C)

payments for the use of resources flow from firms to households, and sales revenue flows from households to firms.

D)

both A and C. Answer:

D Diff: 2

Type: MC

39

Topic: Circular flow diagram Skill: Conceptual

55)

In the circular flow diagram, A)

firms are suppliers in the factor market. B)

firms are buyers in the product market. C)

households are suppliers in the factor market. D)

households are buyers in the factor market. Answer:

C Diff: 1


56)

In a simple circular flow model, there are flows of ________ and flows of ________. A)

factors of production; goods and services B)

funds received from the sale of factors of production; spending on goods and services C)

Both A and B D)

None of the above. Actually, there are no flows in the circular flow of income. Answer:

C Diff: 2

Type: MC

40


41

The figure below shows a circular flow diagram.

57)

Refer to the figure above. Which two veins in the circular flow diagram above capture the following transaction? You write a check for $120 to the campus bookstore for the

purchaseof textbooks.

A)

A and B B)

A and D C)

B and C D)

C and D Answer:

D Diff: 2


58)

Refer to the figure above. Which two veins in the circular flow diagram above capture the following transaction? Kyle receives a salary of $4,000 per month as a landscape designer employed by Zabarte's Landscaping Services.

42

A)

A and C B)

A and B C)

B and C D)

B and D Answer:

B Diff: 2


43

59)

Refer to the figure above. Which vein in the circular flow diagram above shows the flow of wages

and other payments to the factors of production? A)

vein A B)

vein B C)

vein C D)

vein D Answer:

B Diff: 1


60)

Refer to the figure above. Which vein in the circular flow diagram above shows the flow of expenditures on goods and services?

A)

vein A B)

vein B C)

vein C D)

vein D Answer:

C Diff: 1

Type: MC

44


61)

A free market exists when A)

the government monitors every aspect of economic activities to ensure maximum efficiency.

B)

the government places few restrictions on economic activities. C)

buyers and sellers engage in barter rathen than monetary exchange. D)

there is no income tax system. Answer:

B Diff: 1

Type: MC Topic: Free market Skill: Definition

62)

In a free market, goods and services are allocated A)

according to the signals provided by prices. B)

by producer groups such as a chamber of commerce. C)

a benevolent government. D)

by consumers. Answer:

A Diff: 1

45

Type: MC Topic: Free market Skill: Conceptual

46

63)

A person who brings together the factors of production to produce goods and services is called

A)

a CEO (Chief Executive Officer). B)

an entrepreneur. C)

a civic leader. D)

a manager. Answer:

B Diff: 1

Type: MC Topic: Entrepreneur Skill: Definition

64)

The basis for the reliance on markets in modern economics can be traced back to A)

Adam Smith. B)

the founding fathers of the United States. C)

Benjamin Franklin. D)

John Maynard Keynes. Answer:

A Diff: 1

Type: MC Topic: Free market Skill: Factual

47

65)

Adam Smith's "invisible hand" A)

describes how economic agents, acting in their own self-interest bring about a market outcome that promotes general economic well-being.

B)

refers to a "behind the scenes" leader who guides economic activities. C)

describes how governments subtly influence decisions about what to produce and consume. D)

describes how producer groups such as guilds exploit consumers. Answer:

A Diff: 1

Type: MC Topic: Free market Skill: Conceptual

66)

Which of the following is an activity undertaken by an entrepreneur? A)

organizing production by bringing together resources used in the production process B)

risking own funds to start a business C)

bringing new products to the market D)


D Diff: 1

Type: MC Topic: Entrepreneur

48

Skill: Definition

49

67)

Which of the following best defines property rights? A)

The rights economic agents have to the exclusive use of their property, including the right to buy or sell it.

B)

A legal document that verifies ownership of a property. C)

The rights economic agents have to do anything they want with their property. D)

The government's right to appropriate private property for the greater good of society. Answer:

A Diff: 1

Type: MC Topic: Property Rights Skill: Definition

68)

An example of intellectual property is A)

your ownership of your economics textbook. B)

your GPA of 4.0. C)

a short story that you wrote and hope to publish. D)

All of the above are examples of intellectual property. Answer:

C Diff: 1

Type: MC Topic: Property Rights Skill: Conceptual

50

69)

Suppose you have created a new software which has been granted a copyright. In an economy where intellectual property rights are protected and enforced,

A)

anyone who wishes to add human capital can use your software for free. B)

you do not have to pay any taxes on the revenue earned from the sale of your software. C)

anyone who wishes to use your software must seek your permission first or buy the right to use your software from you.

D)

only the government can use your software for free, all others have to pay. Answer:

C Diff: 1

Type: MC Topic: Property Rights Skill: Conceptual

70)

All of the following are vital to the success of a market system except A)

a well defined property rights system. B)

a legal system that will enforce and protect property rights. C)

a system that rewards private individuals for the creation of a new product or process. D)

a system with extensive government control over product and factor markets. Answer:

D Diff: 2

Type: MC

51

Topic: Free market Skill: Conceptual

52

71)

Consider the following statements: "Music companies have attempted to combat free downloads of music by offering inexpensive legal downloads. ...But legal internet sales still represented only about 1 percent of total music sales worldwide. Not surprisingly overall music sales were still declining."

Sources: Steven Levy, "The Noisy War over Napster," Newsweek, June 5, 2000; "Skype: Catch Us If You Can," Fortune, January 26, 2004; Eric Pfanner, "More People Paying for Online Music," International Herald Tribune, January 20, 2005.

Why is it not surprising that overall music sales are declining? A)

because why pay for something when you get get it for free B)

because failure to give full protection of property rights in music has deterred music companies from offering as many CDs for sale

C)

because music companies hope to establish a monopoly in the CD market D)

because the demand for music has decreased Answer:

B Diff: 2

Type: MC Topic: Property Rights Skill: Analytical

The table below shows the maximum output per year by one labor unit in Lobadsi and Tiburon.

Lobadsi TiburonGrain 400 tons 330 tonsJute 200 bales 110 bales

72)

Refer to the table above. Which country has an absolute advantage in the production of grain?

A)

Lobadsi B)

Tiburon

53

C)

neither country D)

both countries Answer:

A Diff: 1


73)

Refer to the table above. Which country has an absolute advantage in jute production? A)

Lobadsi B)

Tiburon C)

neither country D)

both countries Answer:

A Diff: 1


54

74)

Refer to the table above. What is the opportunity cost of a bushel of grain in Lobadsi? A)

200 bales of jute B)

2 bales jute C)

1/2 bale of jute D)

1 labor unit Answer:

C Diff: 1


75)

Refer to the table above. What is the opportunity cost of a bushel of grain in Tiburon? A)

330 bushels B)

1/3 bale of jute C)

3 bales of jute D)

1 labor unit Answer:

B Diff: 1


55

76)

Refer to the table above. If the two countries specialize in producing one good and then engage in trade, who should produce grain?

A)

Tiburon because it has a lower opportunity cost. B)

Lobadsi because it has a higher opportunity cost. C)

Tiburon because it can produce more grain than Tiburon. D)

They should not specialize in just one good each. Answer:

A Diff: 1


77)

What are the two kinds of markets found in the simple circular flow model? Describe how an economic agent might participate in each one as a buyer and a seller.

Answer:

The two kinds of markets in the model are product markets and factor markets. In the product market, households are buyers and firms are sellers of goods and services. In the factor market, households are sellers and firms are buyers of factors of production.

Diff: 1

Type: SA Topic: Circular flow diagram Skill: Conceptual

78)

What is meant by "increasing marginal opportunity cost"? Why does it occur? Answer:

Increasing marginal opportunity costs means that after some point, the opportunity cost of producing additional units of a good increases progressively. In other words, more and more resources have to be devoted to produce each additional unit of a good. Increasing marginal opportunity cost occurs because resources are not equally suited to the production of all goods and services.

Diff: 1

56

Type: SA Topic: Increasing marginal opportunity cost Skill: Definition

57

79)

"A free market provides its participants incentives in the form of prices, profits and property rights." Evaluate this statement.

Answer:

In a free market, prices provide information about whether consumers want more or less of a good. Prices also ensure that the goods and services flow to those who are most willing and able to pay for them. Profit motivates producers to respond to the signals provided by prices. However, for profits to be an effective incentive, producers must be able to keep the profits, that is there must be well defined and enforceable property rights.

Diff: 3

Type: SA Topic: Free market Skill: Analytical

80)

How would the following events affect a nation's production possibilities frontier? Assume a simple two-good production possibilities model. a. A tsunami that kills thousands of people in Sri Lanka.b. The discovery of a low cost alternative source of fuel.c. A hurricane that devastates population and infrastructure.d. A technological advancement that affects the output of one good only.

Answer:

a. inward shift; b. outward shift; c. inward shift; d. rotation in favor of one good. Diff: 1

Type: SA Topic: Production Possibilities Frontier Skill: Conceptual

58

81)

A worker in Rainbarrow can produce 60 umbrellas or 40 raincoats in a given period. A worker in the neighboring city of Mistover can produce 90 umbrellas or 30 raincoats in the same period. a. Draw their production possibilities frontiers. Put umbrellas on the horizontal axis and raincoats on the vertical axis.b. What is Rainbarrow's opportunity cost of an umbrella?c. What is Mistover's opportunity cost of a raincoat?d. If the two countries specialize in producing one product and trade, which country should produce umbrellas? Why?

Answer:

a. See figure below.

b. Rainbarrow's opportunity cost of an umbrella = 2/3 of a raincoatc. Mistover's opportunity cost of a raincoat = 3 umbrellasd. Mistover because it has a lower opportunity cost

Diff: 2

Type: SA Topic: Trade Skill: Analytical

59

82)

The table below shows the output per worker in Spain and France.

Wine(gallons)

Cheese (pounds)

Spain 4 3France 3 3

a. If each country has 1 million workers, complete the table below to show the maximum output of wine for each country.

Total Output Total OutputWine (gallons) Cheese (pounds)

SpainFrance

b. Graph the production possibilities frontier for each country. Put cheese on the horizontal axis and wine on the vertical axis.c. Which country has an absolute advantage in wine production? in cheese production?d. What is the opportunity cost of a gallon of wine in Spain?e. What is the opportunity cost of a gallon of wine in France?f. what is the opportunity cost of a pound of cheese in Spain?g. What is the opportunity cost of a pound of cheese in France. h. If the two countries specialize in the production of one good and trade, which country should specialize in wine production? in cheese production?

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Answer:

a. Total Output Total OutputWine (gallons) Cheese (pounds)

Spain 4 million 3 millionFrance 3 million 3 million

b. See figure below.

c. Spain has an absolute advantage in wine and both countries are equally productive in cheese production.d. Spain's opportunity cost of a gallon of wine is 3/4 pounds of cheese.e. France's opportunity cost of a gallon of wine is 1 pound of cheese.f. Spain's opportunity cost of a pound of cheese is 1-and 1/3 gallons of wine. g. Spain's opportunity cost of a gallon of a pound of cheese is one gallon of wine.h. Spain should specialize in wine and France in cheese.

Diff: 3


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83)

The table below shows the maximum output of wine and cheese for Spain and France using the same amount of resources.

Total Output Total OutputWine (gallons) Cheese (pounds)

Spain 4 million 3 millionFrance 3 million 3 million

a. Graph the production possibilities frontier for each country. Put cheese on the horizontal axis and wine on the vertical axis.b. Suppose each country devotes half its resources to the production of wine and half to the production of cheese. Show the current production and consumption point for each country on its respective production possibilities frontier. Label the points "S" for Spain and "F" for France.c. If the countries specialize and trade with each other, who should produce wine? Who should produce cheese? Explain your answer.d. Verify that with specialization, total output increases without any increase in resources. e. Suppose in exchange for 2 million gallons of wine, the producer of wine receives 1.8 million pounds of cheese. Demonstrate that both countries are better off with this trade. Show the new consumption points on each country 's PPF. Label these points "U" for Spain and "R" for France.

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Answer:


b. See figure above.c. Spain should specialize in wine and France in cheese. Spain has a lower opportunity cost in wine. It's opportunity cost of 1 gallon of wine = 3/4 pounds of cheese whereas France's opportunity cost of 1 gallon of wine = 1 pound of cheese. Similarly, France's opportunity cost of 1 pound of cheese = 1 gallon of wine compared to Spain whose s opportunity cost of 1 pound of cheese = 1-and 1/4 gallons of wine.d. With no trade, total output for the 2 countries = 3.5 million gallons of wine and 3 million pounds of cheese. If they specialize based on comparative advantage, totaloutput for the two countries = 4 million gallons of wine and 3 million pounds of cheese.e. See figure above.

Diff: 3


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84)

Suppose that all manufactured goods can be produced with fewer labor hours in China than in Malaysia. Indicate if the following statements are true, false or uncertain. Explain your answer.a. China has a lower absolute cost of production for all manufactured goods compared to Malaysia.b. The opportunity cost of producing some manufactured goods is lower in Malaysia than in China.c. If the two countries trade in manufactured goods, Malaysia stands to benefit but not China.

Answer:

a. True; China has a lower cost of production in that it has an absolute advantage in the production of all manufactured goods.b. True; Malaysia has a comparative advantage in the production of some manufactured goods.c. False; Trade based on the principle of comparative advantage is mutually beneficial even if China has an absolute advantage in all manufactured goods compared to Malaysia.

Diff: 2


85)

In 18th century Europe, governments gave guilds (association of producers) legal authority to limit production of goods. How did this interfere with Adam smith's hypothetical "invisible hand"?

Answer:

In a free market, the interaction of buyers and sellers, each acting in his or her own self interest, determines the price and quantity of the good produced. By contrast, in 18th century Europe, the government's actions prevented prices from responding to the natural forces of demand and supply, thereby obstructing the invisible hand's ability to coordinate the economic decisions of producers and consumers.

Diff: 3

Type: SA Topic: Free market Skill: Analytical

86)

Define the term "property rights". How do property rights provide economic agents with important incentives to conduct economic activities?

Answer:

Property rights refers to the rights individuals or firms have to the exclusive use of their property including the right to buy or sell it. If property rights are not well defined, economic agents will not have an incentive to maximize the value of their resources. For example, if an entrepreneur cannot fully reap the rewards from her invention, why would she bother to spend funds necessary to develop a new product or a new method of making a product? (Other explanations using consumers will also do.)

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Diff: 2

Type: SA Topic: Property Rights Skill: Definition

65

87)

The table below shows the maximum possible output levels using all resource and currently available technology for the island of Pago-Pago.

Possible

CombinationsPlows Wheat (millions

of bushels) A 20,000 0B 16,000 10 C 12,000 18D 8,000 24E 4,000 28F 0 30

a. Graph Pago-Pago's production possibilities frontier (PPF). b. Does the PPF obey the law of increasing marginal opportunity cost? Explain using the numbers from the data above.c. What is the opportunity cost of the first 10 million of wheat?d. Suppose Pago-Pago is currently producing 12,000 plows and 10 million bushels of wheat. Label this point "G" on your graph. Is this economy producing efficiently? Explain your answer.e. The leader of Pago-Pago has asked the people to vote on two alternatives for the island, Point B and Point D. Which combination would lead to a larger outward shift of the PPF in the future, given that the people of Pago-Pago use plows to farm wheat? Explain your answer.

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Answer:


b. Yes, it does. For each additional 4,00 plows given up, Pago-Pago can produce progressively smaller amounts of wheat. For example, starting at A, the first 4,000 plows foregone yields 10 million bushels of wheat but the next 4,000 plows foregone yields 8 million bushels of wheat. Equivalently, starting at F, for each additional 4,000 plows obtained, Pago-Pago has to reduce the amount of wheat obtained by increasingly larger amounts. c. The opportunity cost of the first 10 million bushels of wheat is 4,000 plows.d. When Pago-Pago produces 12,000 plows and 10 million bushels of wheat, the economy is not producing efficiently. For instance, the graph shows that it is possible to produce an additional 4,000 more plows (moving from 'G' to 'B') without giving up any wheat. e. The combination 'B' would lead to a larger outward PPF because at 'B', Pago-Pago is producing more capital goods (plows) compared to point 'D'. Since capital goods are used for further production, a greater investment in capital goods today leads to greater economic growth and thereby, a greater shift of the PPF.

Diff: 3

Type: SA Topic: Production Possibilities Frontier Skill: Analytical

88)

Explain the difference between a bowed-out production possibilities frontier and a linear production possibilities frontier? Which is more applicable to the real world?

Answer:

A bowed-out PPF demonstrates increasing marginal opportunity cost. This means that additional units of a good can only be produced by giving up progressively more of the other good. A bowed-out PPF occurs because resources are somewhat specialized. A linear PPF demonstrates constant marginal opportunity cost which implies that resources are completely interchangeable and not specialized. A bowed-out PPF is more realistic.

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Diff: 2

Type: SA Topic: Production Possibilities Frontier Skill: Conceptual

89)

Property rights give individuals the incentive to use property under their control efficiently. Answer:

True

False Diff: 1

Type: TF Topic: Property Rights Skill: Conceptual

90)

Patents give the patent holder exclusive rights to market an innovation for a limited period of time.

Answer:

True

False Diff: 1

Type: TF Topic: Property Rights Skill: Definition

91)

For trade to be mutually beneficial it must take place according to the principle of absolute advantage.

Answer:

True

False Diff: 1

Type: TF Topic: Trade Skill: Conceptual

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92)

In the circular flow model, households pay for goods and services using income earned from selling their factors of production to firms.

Answer:

True

False Diff: 1

Type: TF Topic: Circular flow diagram Skill: Conceptual

93)

Increasing marginal opportunity cost occurs because resources are not equally adaptable to the production of all goods and services.

Answer:

True

False Diff: 1

Type: TF Topic: Comparative Advantage Skill: Conceptual

94)

If Jia has a comparative advantage over Gretchen in the production of ceramic vases, it means that Jia can produce ceramic vases at higher opportunity cost.

Answer:

True

False Diff: 1

Type: TF Topic: Comparative Advantage Skill: Definition

95)

Greater quantities of output can be obtained with society's scarce resources when people specialize and trade.

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Answer:

True

False Diff: 1

Type: TF Topic: Trade Skill: Conceptual

70

96)

Unlike market economies, in a command economy prices do not coordinate the interdependent actions of buyers and sellers.

Answer:

True

False Diff: 2

Type: TF Topic: Free market Skill: Conceptual

97)

Comparative advantage is based only on the explicit monetary outlay incurred in production.

Answer:

True

False Diff: 1

Type: TF Topic: Comparative Advantage Skill: Definition

98)

Having an absolute advantage in the production of a good means being able to produce that good at a lower absolute cost.

Answer:

True

False Diff: 1

Type: TF Topic: Absolute Advantage Skill: Definition

99)

Entrepreneurs are more likely to undertake risky ventures in an economic environment where property rights are well defined and enforced.

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Answer:

True

False Diff: 1

Type: TF Topic: Entrepreneur Skill: Conceptual

100)

Adam Smith's "invisible hand" refers to the role of the government in ensuring an equitable distribution of resources.

Answer:

True

False Diff: 1

Type: TF Topic: Free market Skill: Conceptual

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