Unit 1 Basic Economic Concepts Problem Set #1 PDF

Preview

Summary

Basic Economic Concepts Problem Set...

Description

Unit 1 Problem Set #1 1. A. Scarcity is limited resources with unlimited wants. It affects everyone. Scarcity forces choices, causing individuals to have to give up one thing in order to obtain another thing. There is always a trade-off. B. 1. Trade offs are everything you give up when you make a choice, for example, by choosing to take AP Economics you give up taking any other period 4 class. Opportunity costs are the next best alternative that you give up (your second choice), for example, by choosing to take AP Economics you gave up taking period 4 theatre which was your second choice elective. 2. Marginal Decision Making is the idea that you will continue to do something as long as the marginal benefit outweighs the marginal cost. Decisions aren’t “all or nothing,” but rather made in marginal steps, for example, eating one more cookie. 3. Positive Economics is based on facts whereas Normative Economics is based on opinions. Positive avoids and Normative includes value judgments. Positive states what is (what we’re positive about) and Normative states what ought to be. Lastly, all economists agree on Positive Economics whereas they don’t on Normative Economics. An example of Positive Economics is that the unemployment rate is currently 4.3%, and an example of Normative Economics is that AT&T earned excessive profits last year. 4. Consumer Goods are created to be used up, such as pizza. Capital Goods are created to make other goods, such as an oven. 5. Productive Efficiency is when the products are being produced in the least costly way and this is any point on the Production Possibility Curve. Allocative Efficiency is when the products being produced are the ones most desired by society and this optimal point on the PPC depends on the desires of society. 2.

A. The consequences of Sony producing at combination A is that they would not produce any Digital Cameras, and at combination G they would not produce any DVD Players. Both points are productively efficient since they lie on the PPC, but they are not necessarily allocatively efficient since that depends on the desires of society. B. Point X would be impossible or unattainable, and point Y would be inefficient/unemployment. C. By moving from one point to another on the graph, there is an opportunity cost. Points A, B, C, D, E, F, and G are all examples of productive efficiency and could also be allocatively efficient depending on the desires of society. Point Y represents unemployment. Since the graph is bowed out (concaved), it is an example of the law of increasing opportunity costs. Lastly, if the economy were operating at point Y and shifted to any of the points on the curve that would be an examples of economic growth. 3. A. The opportunity cost from point a to b is 5 guns, and the per unit opportunity cost from point e to c is 1/5 guns. B. The opportunity cost from point a to b is 0.5 guns, and from b to c it’s 1.5 guns. The opportunity cost is increasing for guns. C. PPF-B shows increasing opportunity costs because the opportunity cost from a to b is 0.5 guns, from b to c it’s 1.5 guns, from c to d it’s 3 guns, from d to e it’s 5 guns, and from e to f it’s 15 guns. Whereas in PPF-A, the opportunity cost is always 5 guns. 4. 5. A. China has an absolute advantage in producing shirts and in producing TVs because they can produce more shirts and more TVs than India can. B. The per unit opportunity cost is how much each marginal unit costs. It is equal to the opportunity cost divided by the units gained. Shirts TVs China 1S=½T 1 T= 2 S India 1S=¼T 1T=4S C. India has a comparative advantage in shirts since it has a lower opportunity cost in shirts, and China has a comparative advantage in TVs since it has a lower opportunity cost in TVs. D. These countries could benefit from trade because while China has a lower opportunity cost for TVs, India has a lower opportunity cost for shirts. 1 TV for 3 shirts would be a fair terms of trade. 6....