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Arnold Economics 2
Economics by Arnold Chapter 2
| Question | Answer |
|---|---|
| Define a "Production Possibilities Frontier (PPF)" | A graph representing the possible combinations of two goods that can be produced. |
| The PPF has a ____ slope indicating a _____ between the two goods. | downward; tradeoff |
| If the PPF is a straight line this indicates a _____ tradeoff between the two goods. In other words the opportunity cost of producing one good in terms of another is ______. | constant; constant |
| If the PPF is bowed outward (concave downward) this indicates an _____ tradeoff between the two goods. In other words the opportunity cost of producting one good in terms of another is ______. | increasing; increasing |
| Along a PPF the cost of producing additional output on the horizontal axis is measured by _____ | the output given up on the vertical axis. |
| True or False: "To determine the opportunity cost of a good on the vertical axis simply go over to the PPF and then go down to the horizontal axis." | False - you must compare the change in the quantity on the horizontal axis to the change in the quantity on the vertical axis. |
| Define the Law of Increasing Marginal Costs. | As you produce more of a good the opportunity cost increases. |
| How does the PPF illustrate the concept of scarcity? | The fact that the PPF exists (separating the attainable region from the unattainable) implies scarcity. If goods and services were not scarce there would be no unattainable region. |
| How does the PPF illustrate the concept of choice. | If you are on the PPF curve then chooing more of one good means you must choose less of another. |
| How does the PPF illustrate the concept of opportunity cost? | If you are on the PPF curve then chooing more of one good means you must forego some of another good. |
| How does the PPF illustrate the concept of productive efficiency? | All of the points on the PPF are efficient. |
| How does the PPF illustrate the concept of productive inefficiency? | All of the points below the PPF (within the attainable region but not on the PPF) are inefficeint. |
| True or False: "Increasing the amount of one good by moving away from an inefficient point on a PPF graph means giving up some of the other good. | False |
| True or False: "If some resources are unemployed this will cause the PPF to shift inward." | False - you would simply be below the PPF, in the inefficient range. |
| What two factors could cause an outward shift in the PPF? | Either (1) an increase in the amount of resources or (2) an increase in the technology of production. |
| What is "technology in production"? | This refers to the way in which resources are used to produce goods and services. An increase in the technology of production means that you can produce more output with the same amount of inputs. |
| What does "ex ante" mean? | Before |
| What does "ex post" mean? | After |
| When we say that trade benefits people are we refering to "ex ante" or "ex post" benefits of exchange? | Ex ante - we will only agree to engage in trade if we expect to benefit. |
| Define the "terms of trade". | The rate of exchange - how much of one good is exchanged for another. |
| Define "transaction costs". | The costs of searching for, negotiating and consumating an exchange. |
| True or False: "A good way of reducing transaction costs is to 'cut out the middleman'". | False - As a general rule the function of middlemen is to lower transaction costs. |
| What is a "third-party effect"? | When an exchange effects someone (the third party) who is not directly involved in the trade. |
| Define "comparative advantage". | When one party can produce a good at a lower opportunity cost than another party. |
| Yogi can produce a picnic basket in 3 hours while it takes Boo Boo 6 hours to produce the same basket. True or False: "Yogi must have a comparative advantage in producing picnic baskets." | False - opportunity cost can only be measured in terms of foregone outputs (not inputs). Without knowing what else Yogi and Boo Boo could have done it is impossible to tell who has the comparative advantage in producing picnic baskets. |
| In a certain amount of time Gilligan could either gather 10 coconuts or catch 2 fish. In the same amount of time Mary Ann could gather 20 coconuts or catch 10 fish. True or False: "Mary Ann has a comparative advantage in both coconuts and fish." | False - it is not possible for one person to have a comparative advantage in all products. |
| In a certain amount of time Gilligan could either gather 10 coconuts or catch 2 fish. In the same amount of time Mary Ann could gather 20 coconuts or catch 10 fish. Who has a comparative advantage in coconuts and who in fish? | Mary Ann has a comparative advantage in fish (Mary Ann: 1 fish costs 2 coconuts while Gilligan: 1 fish costs 5 coconuts). Gilligan has the comparative advantage in coconuts (Gilligan: 1 coconut costs 1/5 fish, Marry Ann: 1 coconut costs 1/2 fish) |
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bscollier
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