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ECON 402 Study Guide - Quiz Guide: Opportunity Cost, Economic System, Absolute AdvantageExam

Course Code
ECON 402
William Crowley
Study Guide

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Production Possibilities Frontiers and Opportunity Costs
Learning Objective: Use a production possibilities frontier to analyze
opportunity costs and trade-offs.
Review Questions
1.1 Scarcity is the situation in which wants exceed the limited resources available to fulfill those
wants. There are some things that are available in such abundance that they exceed our wants. For
example, for most people there is enough oxygen in the atmosphere that the amount they want to
inhale equals or exceeds the amount available—so oxygen isn’t scarce for them. Another example
might be something undesirable, such as weeds in your gardenunlike tomato plants, the number
of weeds available exceeds the number you desire.
1.2 The production possibilities frontier (PPF) is a curve showing all the attainable combinations of
two products that may be produced with available resources and existing technology.
Combinations of goods that are on the frontier are efficient because all available resources are
being fully used, and the fewest possible resources are being used to produce a given amount of
output. Points inside the production possibilities frontier are inefficient because the maximum
output is not being obtained from the available resources. A production possibilities frontier will
shift outward (to the right) if more resources become available for making the products or if
technology improves so that firms can produce more output with the same amount of inputs.
1.3 Increasing marginal opportunity costs means that as more and more of a product is made, the
opportunity cost of making each additional unit rises. It occurs because the first units of a good are
produced with the resources that are best suited for making it, but as more and more of the good is
produced, resources must be used that are better suited for producing something else. Increasing
marginal opportunity costs imply that the production possibilities frontier (PPF) is bowed outthat
the slope of the PPF gets steeper and steeper as you move down it.
Problems and Applications
1.4 a. The production possibilities frontiers in the figure are bowed to the right from the origin
because of increasing marginal opportunity costs. The drought causes the production
possibilities frontier to shift to the left (see graph below in part (b)).
b. The genetic modifications would shift to the right the maximum soybean production
(doubling it), but not the maximum cotton production.

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1.5 Increased safety will decrease maximum range, as shown in the figure below. Trade-offs can be
between physical goods, such as cotton and soybeans in problem 1.4, or between the features of a
product, like the maximum range and the safety of an electric car.
1.6 The opportunity cost of Tesla’s investment in a new battery factory in Nevada is what the
company considered to be the best alternative for using the funds that were used to build the
factory. This best alternative may have been investing the funds in developing new electric cars,
distributing the funds to the corporation’s shareholders, or some other option.
1.7 One could argue that the price paid for a book is a close approximation to the opportunity cost of
buying a book, but consumingthat is, readingthe book could require many hours of leisure
time that could be spent on some other activity. The time spent reading a book always has an
opportunity cost.
1.8 a. The production possibilities frontier will be bowed out like Figure 2.2 because some
economic inputs are likely to be more productive when making capital goods, and others are
likely to be more productive when making consumption goods.

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c. Because it will have more machinery and equipment, Luxembourg is likely to experience
more rapid growth in the future.
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