Eco 201 Module 2 Quiz - M/C with answers PDF

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M/C with answers...

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1. Specialization and production possibilities

Suppose Canada produces only smartphones and tablets. The resources that are used in the production of these two goods are not specialized—that is, the same set of resources is equally useful in producing both tablets and smartphones. The shape of Canada's production possibilities frontier (PPF) should reflect the fact that as Canada produces more tablets and fewer smartphones, the opportunity cost of producing each additional tablet remains constant .

Points: 1/1 Close Explanation Explanation: Recall that the same set of resources is equally useful in producing both tablets and smartphones. This means that if Canada decides to produce more smartphones and fewer tablets, the resources that it uses to produce the additional smartphones will be as well suited to the production of smartphones as the resources already being used in smartphone production. Therefore, the opportunity cost of producing each additional smartphone remains constant as more smartphones are produced. The following graphs show two possible PPFs for Canada's economy: a straight-line PPF ( PPF1PPF1) and a bowed-out PPF (PPF2PPF2). Graph 1SMARTPHONESTABLETSPPF1 Graph 2SMARTPHONESTABLETSPPF2 Based on the previous description, the trade-off Canada faces between producing tablets and Graph 1 . smartphones is best represented by

Points: 1/1 Close Explanation Explanation: For bowed-out PPFs, the opportunity cost of producing smartphones is reflected in the curvature of the PPF. In flatter regions, producing an additional tablet requires giving up fewer smartphones. However, in steeper regions, producing an additional tablet requires giving up more smartphones. In other words, the opportunity cost of producing tablets changes as you move along the PPF.

For linear PPFs, the opportunity cost of producing tablets is constant and reflected in the slope of the PPF. If the PPF is flatter, producing an additional tablet requires giving up fewer smartphones. If the PPF is steeper, producing an additional tablet requires giving up more smartphones. In this case, because the opportunity cost of producing additional tablets remains constant as more resources are shifted to the production of tablets, the PPF must be linear. Therefore, Graph 1 best represents the trade-off Canada faces between producing tablets and smartphones. 2. Comparative and absolute advantage

Eric and Ginny are farmers. Each one owns a 20-acre plot of land. The following table shows the amount of alfalfa and barley each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing alfalfa or barley or to produce alfalfa on some of the land and barley on the rest.

Alfalfa (Bushels per acre)

Barley (Bushels per acre)

Eric

30

10

Ginny

28

7

On the following graph, use the blue line (circle symbol) to plot Eric's production possibilities frontier (PPF), and use the purple line (diamond symbol) to plot Ginny's PPF. Your AnswerEric's PPFGinny's PPF01002003004005006007008009001000200180160140120100806040200BARLEY (Bushels)ALFALFA (Bushels) Correct Answer Points: 1/1 Close Explanation Explanation: You can see that when Eric devotes all 20 acres to producing alfalfa, he can produce 600 bushels of alfalfa per year (20

acres×30 bushels per acre20 acres×30 bushels per acre). On the other

hand, when he uses all 20 acres to produce barley, he produces 200 bushels of barley per year (20

acres×10 bushels per acre20 acres×10 bushels per acre). Therefore, his PPF extends from

(600, 0) to (0, 200). You can do similar calculations for Ginny to show that when she devotes all of her land to producing alfalfa, she can produce 560 bushels of alfalfa per year. On the other hand, when she uses all 20 acres

to produce barley, she produces 140 bushels of barley per year. Therefore, her PPF extends from (560, 0) to (0, 140). Notice that both PPFs are linear rather than bowed outward because there is a constant trade-off between the two goods. Eric

has an absolute advantage in the production of alfalfa, and

Eric

has an absolute

advantage in the production of barley. Points: 1/1 Close Explanation Explanation: An individual has an absolute advantage in the production of a good if he or she can produce a unit of output using fewer resources than someone else. Here, the only resource you should consider is land. Eric can produce 30 bushels of alfalfa per acre of land, while Ginny can produce 28 bushels of alfalfa per acre of land. Therefore, Eric has an absolute advantage in the production of alfalfa. Similarly, Eric can produce 10 bushels of barley per acre of land, while Ginny can produce 7 bushels of barley per acre of land. Therefore, Eric has an absolute advantage in the production of barley. Since Eric and Ginny own the same resources (in this case, the size of both plots of land is the same), another way you can determine who has the absolute advantage in the production of a good is to see who can produce more of that good if both people devote all of their resources to making it. Eric's opportunity cost of producing 1 bushel of barley is

3

bushels of alfalfa, whereas Ginny's opportunity cost of producing 1 bushel of barley is

4 bushels of alfalfa. Because Eric has a

Eric

lower

opportunity cost of producing barley than Ginny,

has a comparative advantage in the production of barley, and

Ginny

has a

comparative advantage in the production of alfalfa. Points: 1/1 Close Explanation

Explanation: For each acre Eric uses to produce alfalfa, he produces 30 bushels of alfalfa per year. But using that acre to produce alfalfa means he must forgo the 10 bushels of barley he could have produced on that land. Therefore, Eric's opportunity cost of producing 30 bushels of alfalfa is 10 bushels of barley, so the opportunity cost of producing each bushel of alfalfa is 1/3 bushel of barley per bushel of alfalfa (10 bushels of barley30 bushels of alfalfa10 bushels of barley30 bushels of alfalfa). (Note: The slope of Eric's PPF is -1/3.) You can compute Eric’s opportunity cost of producing a bushel of barley by taking the reciprocal of the opportunity cost of producing a bushel of alfalfa. That is, the opportunity cost of producing a bushel of barley, in this case, is 3 bushels of alfalfa per bushel of barley. By the same logic, Ginny could use an acre of land to produce either 28 bushels of alfalfa or 7 bushels of barley, so her opportunity cost of producing alfalfa is 1/4 bushel of barley per bushel of alfalfa (7 bushels of barley28 bushels of alfalfa7 bushels of barley28 bushels of alfalfa). (Note: The slope of Ginny's PPF is -1/4.) Comparative advantage is determined by the opportunity cost of producing a good rather than the amount of resources used to make that good. An individual has a comparative advantage in producing a good if he or she can produce it at a lower opportunity cost than someone else. In this case, Eric has a lower opportunity cost of producing barley than Ginny, so Eric has a comparative advantage in the production of barley. Note that the opposite is true for alfalfa: Repeating the previous calculations, you can see that Eric's opportunity cost of producing a bushel of alfalfa is 1/3 bushel of barley, and Ginny's opportunity cost of producing a bushel of alfalfa is 1/4 bushel of barley. Therefore, Ginny has a comparative advantage in the production of alfalfa, since she gives up less barley to produce alfalfa. Notice that, although it is possible for one person to have an absolute advantage in the production of both goods, it is impossible for one person to have a comparative advantage in the production of both goods. Since Eric has a lower opportunity cost of producing barley than Ginny has, it must be the case that Ginny has a lower opportunity cost of producing alfalfa than Eric has. On the other hand, if both individuals have the same opportunity cost of producing both goods, neither has a comparative advantage in the production of either good. 3. Opportunity Cost

Dina and Juanita are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Dina takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Juanita takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza.

Dina's opportunity cost of making a pizza is

cost of making a pizza is

5/7 gallon

2/3 gallon

of root beer, and Juanita's opportunity

of root beer.

Points: 1/1 Close Explanation Explanation: The opportunity cost of an item is what you give up to get that item. In this case, Dina's opportunity cost of making a pizza is the amount of root beer she gives up brewing. Making a pizza takes her 2 hours; if instead she spent her time producing root beer, she would produce

2 hours×1 gallon of root beer3 hours=2/3 gallon of root beer2 hours×1 gallon of root be

er3 hours=2/3 gallon of root beer. Similar calculations yield an opportunity cost of 5/7 gallon of root beer for one pizza for Juanita. See Section: Opportunity Cost and Comparative Advantage. Dina

has an absolute advantage in making pizza, and

Dina

has a comparative advantage

in making pizza. Points: 1/1 If Dina and Juanita trade foods with each other,

Dina

will trade away pizza in exchange for root

beer. Points: 1/1 Close Explanation Explanation: Economists use the term absolute advantage when comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. In this case, Dina has an absolute advantage in making pizza because she can make one in 2 hours, while it takes Juanita 5 hours. Economists use the term comparative advantage when describing the opportunity costs faced by two producers. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it. In this case, Dina has a comparative advantage in making pizza because she has a lower opportunity cost in terms of root beer given up (2/3 gallon of root beer for Dina versus 5/7 gallon of root beer for

Juanita). Therefore, Dina will trade away pizza in exchange for root beer. See Sections: Absolute Advantage; and Opportunity Cost and Comparative Advantage. The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza 5/7 gallon of root beer, and the can be traded that would make both roommates better off is

lowest price that makes both roommates better off is

2/3 gallon

of root beer per pizza.

Points: 1/1 Close Explanation Explanation: The highest price of pizza in terms of root beer that will make both roommates better off is 5/7 gallon of root beer. If the price were higher than that, then Juanita would prefer making her own pizza (at an opportunity cost of 5/7 gallon of root beer) rather than trading for pizza that Dina makes. The lowest price of pizza in terms of root beer that will make both roommates better off is 2/3 gallon of root beer. If the price were lower than that, then Dina would prefer making her own root beer rather than trading for root beer that Juanita makes. See Section: Comparative Advantage and Trade. 4. Production Possibility Frontier

An economy consists of three workers: Brian, Edison, and Kevin. Each works 10 hours a day and can produce two services: mowing lawns and washing cars. In an hour, Brian can either mow 2 lawns or wash 1 car; Edison can either mow 1 lawn or wash 1 car; and Kevin can either mow 1 lawn or wash 2 cars. For each of the scenarios listed in the following table, determine how many lawns will be mowed and how many cars will be washed per day and enter these values into the corresponding row.

Lawns Mowed

Scenario

Cars Washed

All three spend all their time mowing lawns. (A)

40

0

All three spend all their time washing cars. (B)

0

40

All three spend half their time on each activity. (C)

20

20

Brian spends half his time on each activity, while Edison only

20

15

washes cars and Kevin only mows lawns. (D)

Points: 1/1 Close Explanation Explanation: When all three workers spend all their time mowing lawns, they can mow (2

lawns per hour+1 lawn per hour+1 lawn per hour)×10 hours=40 lawns2 l

awns per hour+1 lawn per hour+1 lawn per hour×10 hours=40 lawns and wash 0 cars. When all three workers spend all their time washing cars, they can mow 0 lawns and wash

(1 car per hour+1 car per hour+2 cars per hour)×10 hours=40 cars1 car per h

our+1 car per hour+2 cars per hour×10 hours=40 cars. When all three workers spend half their time on each activity, they can mow (2

lawns per hour+1 lawn per hour+1 lawn per hour)×5 hours=20 lawns2 la

wns per hour+1 lawn per hour+1 lawn per hour×5 hours=20 lawns and wash

(1 car per hour+1 car per hour+2 cars per hour)×5 hours=20 cars1 car per ho

ur+1 car per hour+2 cars per hour×5 hours=20 cars. Finally, when Brian spends half his time on each activity, Edison only washes cars, and Kevin only mows lawns, they can mow (2

lawns per hour×5 hours)

+(1 lawn per hour×10 hours)=20 lawns2 lawns per hour×5 hours+1 lawn per hour×10 hou rs=20 lawns and wash

(1 car per hour×5 hours)

+(1 car per hour×10 hours)=15 cars1 car per hour×5 hours+1 car per hour×10 hours=15 c ars. See Section: Our Second Model: The Production Possibilities Frontier. In the following table, identify the opportunity cost of washing cars for each worker.

Worker Brian

Opportunity Cost of Washing Cars 2 lawns per car

Edison

1 lawn per car

Kevin

1/2 lawn per car

Points: 1/1 Assume that the resources best suited to producing a particular service are preferentially used in the production of that service and that as the economy moves down along the production possibilities

frontier, one worker at a time is transferred from mowing lawns to washing cars. Using the blue points (circle symbol), graph the production possibilities frontier (PPF) for this economy on the following graph. Then use the black point (plus symbol) to identify point A, the green point (triangle symbol) to identify point B, the orange point (square symbol) to identify point C, and the purple point (diamond symbol) to identify point D on the graph. Your AnswerPPFABCD0510152025303540455050454035302520151050Quantity of Lawns MowedQuantity of Cars Washed Correct Answer Points: 1/1 Close Explanation Explanation: The production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, if all workers devote their time to mowing lawns, they can mow 40 lawns, so (0, 40) must be a point on the production possibilities frontier. Similarly, if all workers devote their time to washing cars, they can wash 40 cars, so (40, 0) must be another point on the production possibilities frontier. To construct the points in between, begin at the point where all three workers are mowing lawns (0, 40), and consider the person who has the lowest opportunity cost for washing cars. This person should be the first person to give up mowing lawns in exchange for washing cars. In this case, Kevin's opportunity cost of washing a car is mowing half a lawn. So the first segment of the production possibilities frontier from (0, 40) to (20, 30) represents Kevin's trade-off between washing cars and mowing lawns: Kevin can wash 20 cars at a cost of mowing 10 lawns. Once Kevin is washing as many cars as he can, then consider the person who has the next lowest opportunity cost of washing cars. In this case, Edison's opportunity cost of washing a car is mowing a lawn. So the second segment of the production possibilities frontier from (20, 30) to (30, 20) represents Edison’s trade-off between washing cars and mowing lawns: Edison can wash 10 cars at a cost of mowing 10 lawns. To construct the final segment, only Brian remains. Therefore, the third segment of the production possibilities frontier from (30, 20) to (40, 0) represents Brian's trade-off between washing cars and mowing lawns. See Section: Our Second Model: The Production Possibilities Frontier.

True or False: The production possibilities frontier consists of straight-line segments, rather than being smoothly bowed outward throughout, because each worker faces a constant trade-off between mowing lawns and washing cars. True False Points: 1/1 Close Explanation Explanation: In this case, the production possibilities frontier consists of straight-line segments, rather than being smoothly bowed outward throughout, because each worker faces a constant trade-off between mowing lawns and washing cars. Edison is equally productive at both tasks, Kevin is twice as productive washing cars as he is mowing lawns, and Brian is twice as productive mowing lawns as he is washing cars. See Section: Our Second Model: The Production Possibilities Frontier. Indicate whether each of the following allocations is efficient or inefficient.

Allocation

Efficient

Inefficient

A

B

C

D Points: 1/1 Close Explanation Explanation:

An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier represent efficient levels of production. Therefore, while all the allocations are feasible, only allocations A and B are efficient. See Section: Our Second Model: The Production Possibilities Frontier. 5. Comparative Advantage

The following table describes the production possibilities of two cities in the country of Baseballia:

Pairs of Red Socks per Worker per Hour

Pairs of White Socks per Worker per Hour

Boston

3

6

Chicago

5

4

Without trade, the price of a pair of white socks (in terms of red socks) in Boston is

red socks, and in Chicago it is

1 1/4 pairs

1/2 pair

of

of red socks.

Points: 1/1 Close Explanation Explanation: Without trade, the price of a pair of white socks is 1/2 pair of red socks in Boston and 1 1/4 pairs of red socks in Chicago. See Section: Opportunity Cost and Comparative Advantage. Chicago

has an absolute advantage in the production of red socks, and

Boston

has an

absolute advantage in the production of white socks. Points: 1/1 Close Explanation Explanation: Economists use the term absolute advantage when comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. In this case, Chicago has an absolute advantage in producing red socks and Boston has an absolute advantage in producing white socks. See Section: Absolute Advantage.

Chicago

has a comparative advantage in the production of red socks, and

Bos...