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1) How does the study of economics depend upon the phenomenon of scarcity?
2) Define opportunity cost. What is the opportunity cost to you of attending ASE? What was your opportunity cost of
coming to class today?
3) The following table contains some production possibilities for an economy for a given month.
Tables Chairs
5 300
10 ?
15 100
If the production possibilities frontier is bowed outward, then ? could be:
4) The following table contains some production possibilities for an economy for a given year:
Cakes Rolls
100 5000
120 4600
140 ?
If the production possibilities frontier is bowed outward, then "?" could be:
5) In a certain economy, toys and greeting cards are produced, and the economy currently operates on its production
possibilities frontier. Which of the following events would allow the economy to produce more toys and more
greeting cards, relative to the quantities of those goods that are being produced now? (Illustrate a graph for each
possible answer)
a) The economy experiences economic growth.
b) There is a technological advance in the toy industry, but the greeting card industry experiences no such advance.
c) There is a technological advance in the greeting card industry, but the toy industry experiences no such advance.
d) All of the above are correct.
N
pans
At which point is this economy producing its maximum possible quantity of pans?
This economy has the ability to produce at which point(s)?
This economy cannot produce at which point(s)?
Efficient production is represented by which point(s)?
Inefficient production is represented by which point(s)?
Unemployment could cause this economy to produce at which point(s)?
9) Figure 2
lamps
50
45
40
35
V
30
25
Z
20
15
W Y
10
10 20 30 40 50 60 70 80 notepads
If this economy devotes all of its resources to the production of notepads, then it will produce:
It is possible for this economy to produce
a) 40 notepads and 20 lamps.
b) 50 notepads and 30 lamps.
c) 70 notepads and 40 lamps.
d) All of the above.
It is not possible for this economy to produce at point:
This economy cannot currently produce 30 notepads and 45 lamps because
a) some of its resources are unemployed.
b) inefficiencies exist in this economys production process.
c) given its current technology, it does not have the resources to produce that level of output.
Suppose this economy is producing at point W. Which of the following statements would best explain this
situation?
a) The economy lacks the resources to produce at a more desirable point.
b) The economys available technology prevents it from producing at a more desirable point.
c) There is widespread unemployment in the economy.
d) Any of the above statements would be a legitimate explanation for this situation.
Efficient production is represented by which point(s)?
Inefficient production is represented by which point(s)?
The opportunity cost of this economy moving from point Z to point Y is:
The opportunity cost of obtaining 20 additional lamps by moving from point W to point V is
a) 0 notepads.
b) 10 notepads.
c) 50 notepads.
d) None of the above; the economy cannot move from point W to point V.
The opportunity cost of obtaining 10 additional lamps by moving from point W to point Z is
a) 0 notepads.
b) 10 notepads.
c) 50 notepads.
d) None of the above; the economy cannot move from point W to point Z.
12) Explain the difference between absolute advantage and comparative advantage. Which is more important in
determining trade patterns, absolute advantage or comparative advantage? Why?
13) The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
275 275
250 250
225 225
200 200
175 175
150 150
125 125
100 100
75 75
50 50
25 25
25 50 75 100 125 150 175 200 225 250 peanuts 25 50 75 100 125 150 175 200 225 peanuts
a) Assume that each country decides to use half of its resources in the production of each good. Show these points on
the graphs for each country as point A.
b) If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
c) Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By
specializing, what is the total world production of each product now?
d) If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each
country would receive from trade. Label these points B.
14) Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same kind of meal in 2
hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she pays him $45 per
meal to fix her meals? Explain.
15) Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do
a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation
and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the
slides.
a) How much time would it take the two to complete the project if they divide the calculations equally and the slides
equally?
b) How much time would it take the two to complete the project if they use comparative advantage and specialize in
calculating or preparing slides?
c) If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize
in calculating or preparing slides?