ECO 211 Chapter Notes - Chapter 2: Marginal Cost, Opportunity Cost, Allocative Efficiency

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This chapter presents the basic ricardian model of how specialization in production creates potential gains from trade. Equity and efficiency are two objectives of public policy. Production is the conversion (or transformation) of land, labor, capital, and entrepreneurial ability into goods. The production possibility frontier (ppf) and services (inputs into outputs). The production possibilities frontier (ppf) marks the boundary between those combinations of goods and services that can be produced and those that cannot. Labor is the time and effort people devote to production. Largest factor is producing goods and services is people. Land includes all resources from nature used in production. Land includes all productive resources, including raw materials (i. e. oil). (physical) capital is goods produced for use in producing other goods & services. (both an input and an output) The term capital, as used by economists, refers to physical rather than financial capital. Human capital is not included in the capital input to production.

Related Questions

A bowed out PPF reflects which of the following ideas?

i.increasing opportunity cost

ii. resources are not equally productive in all activities

iii. prices of goods increase over time

		I only
		I and iii
		ii and iii
		I and ii

1 point

QUESTION 2

With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF.

		can; cannot
		cannot; can
		cannot; cannot
		can; can

1 point

QUESTION 3

If the production possibilities frontier between two goods is a straight line, then the

		the line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points.
		opportunity cost is not a ratio.
		increasing opportunity costs.
		resources are equally productive in both goods.

1 point

QUESTION 4

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It decreases.
		It increases.
		It remains constant.

1 point

QUESTION 5

"Comparative advantage" is defined as a situation in which one person can produce

		more of a good than another person.
		a good for a lower dollar cost than another person.
		a good for a lower opportunity cost than another person.
		more of all goods than another person.

1 point

QUESTION 6

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		increases.
		decreases.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		remains constant.

1 point

QUESTION 7

A bowed out production possibility frontier shows that the

		opportunity cost relationship is linear.
		the opportunity cost of a good is constant as more of the good is produced.
		the opportunity cost of a good increase as more of the good is produced.
		the opportunity cost of a good decrease as more of the good is produced.

1 point

QUESTION 8

Which of the following statements is correct?

		The production possibilities frontier shows that there are no limits to production.
		Any point on or within the PPF is production efficient.
		If capital is idle, the economy is producing at its full potential.
		A tradeoff is a limit that forces an exchange or a substitution of one thing for something else.

1 point

QUESTION 9

A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why?

		A tradeoff would occur to replace the resources and goods destroyed.
		It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed.
		It would shift outward because unemployment would be reduced.
		Nothing would happen because the nation would still have the same capabilities.

1 point

QUESTION 10

When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods

		must increase.
		must decrease.
		must remain the same.
		must change but they might increase or decrease.

1 point

QUESTION 11

Moving along a country's PPF, a reasonable opportunity costs increase is that

		unemployment increases as a country produce more and more of one good.
		unemployment decreases as a country produces more and more of one good.
		some resources are better suited for producing one good rather than the other.
		technology declines as a country produce more and more of one good.

1 point

QUESTION 12

A reason the production possibilities frontier exists is

		scarcity of resources and unlimited technology.
		unemployment.
		scarcity of resources.
		unlimited resources and technology.

1 point

QUESTION 13

Moving from one point to another on a production possibilities frontier implies

		increasing the production of one good and decreasing the production of another.
		increasing the production of both goods.
		decreasing the production of both goods.
		holding the production levels of both goods constant.

1 point

QUESTION 14

Specialization and trade make a country better off because with trade the country can consume at a point

		outside its production possibilities frontier.
		on its trading partner's production possibilities frontier.
		inside its production possibilities frontier.
		on its production possibilities frontier.

1 point

QUESTION 15

The production possibilities frontier is the

		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing.
		the minimum output that can be produced when resources are used inefficiently.
		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.
		maximum output that can be produced at an opportunity cost of zero.

1 point

QUESTION 16

The opportunity cost of economic growth is ________ and the benefit of economic growth is ________.

		decreased current consumption; decreased future consumption
		decreased current consumption; increased future consumption
		increased current consumption; increased future consumption
		increased current consumption; decreased future consumption

1 point

QUESTION 17

In terms of a nation's production possibilities frontier, what impact does international trade have?

		International trade shifts the nation's production possibilities frontier outward.
		International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported.
		International trade shifts the nation's production possibilities frontier inward.
		International trade allows the nation to consume at a point outside its production possibilities frontier.

1 point

QUESTION 18

The production possibilities frontier illustrates the

		goods and services that people want.
		limits to people's wants.
		resources the economy possesses, but not it is the level of technology.
		maximum combinations of goods and services that can be produced.

1 point

QUESTION 19

As we move along the production possibilities frontier,

		the possibilities of tradeoffs diminish.
		the production of one good increases as the production of the other good decreases.
		more of both goods can be produced.
		a tradeoff is not possible because nations need all goods.

1 point

QUESTION 20

What is the opportunity cost of economic growth?

		Eliminate scarcity
		Land.
		Capital goods.
		Consumption of goods.

1 point

QUESTION 21

Which of the following statements is correct?

i.As the economy grows, the opportunity costs of economic growth decrease.

ii. Economic growth has no opportunity cost.

iii. The opportunity cost of economic growth is current consumption forgone.

		ii only
		iii only
		I only
		I and iii

1 point

QUESTION 22

Does economic growth depend upon which of the following?

i. Increasing the quantity of labor.

ii. Lowering the prices of goods and services.

iii. Advancing technology.

		ii only.
		I only.
		I and iii.
		iii only.

1 point

QUESTION 23

When drawing a production possibilities frontier, which of the following is held constant?

		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced
		the available factors of production and the state of technology

1 point

QUESTION 24

To increase its economic growth, a nation should

		encourage spending on goods and services.
		increase in current consumption.
		encourage education because that increases the quality of labor.
		limit the number of people in college because they produce nothing.

1 point

QUESTION 25

The opportunity cost of one more slice of pizza in terms of sodas is the

		some pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.
		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.

jadecrow966

The opportunity cost of one more slice of pizza in terms of sodas is the

		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.
		the number of pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.

1 point

QUESTION 2

A production possibilities frontier shows

		how money can be allocated among two kinds of goods.
		the limits to the future growth of a nation.
		the various combinations of output a nation can produce at a certain time, given its available resources and technology.
		that if the price of one good decreases, the price of the other has to increase.

1 point

QUESTION 3

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		remains constant.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		increases.
		decreases.

1 point

QUESTION 4

When all of the available factors of production are being efficiently employed, the

		the economy is producing at a point within its PPF.
		PPF disappears.
		the economy is producing at a point beyond its PPF.
		the economy is producing at a point on its PPF.

1 point

QUESTION 5

If a nation devotes a larger share of its current production to consumer goods, then

		its PPF will shift inward.
		its economic growth will slow down.
		its PPF will shift outward.
		some productive factors will become unemployed.

1 point

QUESTION 6

A point on the production possibilities frontier reflects an

		the attainable point with full employment of all resources.
		attainable point without full employment of all resources.
		unattainable point without full employment of all resources.
		the unattainable point with full employment of all resources.

1 point

QUESTION 7

When drawing a production possibilities frontier, which of the following is held constant?

		the available factors of production and the state of technology
		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced

1 point

QUESTION 8

As we move along the production possibilities frontier,

		more of both goods can be produced.
		the possibilities of tradeoffs diminish.
		a tradeoff is not possible because nations need all goods.
		the production of one good increases as the production of the other good decreases.

1 point

QUESTION 9

Which of the following is an assumption used when drawing a production possibilities frontier?

i.Human wants and desires are limited to what is available.

ii. Only two goods are considered.

iii. The level of technology is fixed and unchanging.

		I and iii
		ii only
		I, ii, and iii
		I only

1 point

QUESTION 10

To achieve gains from trade, a country

		needs to have an absolute advantage in the production of all goods.
		specializes in producing a good in which it has a lower opportunity cost.
		must produce at a point beyond its PPF.
		should produce at the midpoint of its PPF.

1 point

QUESTION 11

Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.

		a comparative advantage
		more production efficiency
		a marginal benefit
		a comparative benefit

1 point

QUESTION 12

Does economic growth depend upon which of the following?

i.Improving the quality of labor

ii. Technological advancement

iii. Increasing the amount of capital

		iii only
		ii only
		I only
		I, ii, and iii

1 point

QUESTION 13

In one hour John can produce 20 loaves of bread or 18 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

		John has a comparative advantage in producing cakes.
		Phyllis has an absolute advantage in both goods.
		Phyllis has a comparative advantage in producing cakes.
		John has an absolute advantage in both goods.

1 point

QUESTION 14

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It decreases.
		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It remains constant.
		It increases.

1 point

QUESTION 15

The production possibilities frontier illustrates the

		goods and services that people want.
		maximum combinations of goods and services that can be produced.
		resources the economy possesses, but not it is the level of technology.
		limits to people's wants.

1 point

QUESTION 16

The United States produced approximately ________ worth of goods and services in 2007.

		$14 billion
		$14 trillion
		$140 billion
		$140 trillion

1 point

QUESTION 17

The fact of increasing opportunity cost when moving on the PPF means that

		to increase the production of one product requires smaller and smaller sacrifices of the other good.
		to decrease the production of one product requires smaller and smaller sacrifices of the other good.
		to increase the production of one product requires larger and larger sacrifices of the other good.
		when the government forces a movement from one point on the PPF to another point, no production is lost.

1 point

QUESTION 18

Other things equal, if India devotes more resources to educate its population than China,

		China will grow faster than India.
		India will be able to eliminate scarcity faster than China.
		India will be able to eliminate opportunity cost faster than China.
		India will grow faster than China.

1 point

QUESTION 19

For Ireland to grow more potatoes, wool production must decrease. This situation is an example of

		zero opportunity cost.
		producing at a point that lies beyond the PPF.
		opportunity benefit.
		a tradeoff.

1 point

QUESTION 20

Moving from one point to another on a production possibilities frontier implies

		increasing the production of both goods.
		increasing the production of one good and decreasing the production of another.
		holding the production levels of both goods constant.
		decreasing the production of both goods.

1 point

QUESTION 21

The United States is one of the richest nations in the world,

		but it can still benefit from specialization and trade.
		so does not need to trade with poor nations to achieve any gains from trade.
		so might not have a comparative advantage in producing any goods.
		so it must have a comparative advantage in the production of all goods.

1 point

QUESTION 22

"Comparative advantage" is defined as a situation in which one person can produce

		more of all goods than another person.
		a good for a lower opportunity cost than another person.
		a good for a lower dollar cost than another person.
		more of a good than another person.

1 point

QUESTION 23

The idea of increasing opportunity cost is reflected in the

		the linear shape of the production possibilities frontier.
		bowed in the shape of the production possibilities frontier.
		bowed out the shape of the production possibilities frontier.
		the positive slope of the production possibilities frontier.

1 point

QUESTION 24

Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country?

i)It enjoys gains from trade.

ii)It must have an absolute advantage in the production of the good it produces.

iii)It is producing at a point beyond its PPF.

		I only.
		I and ii.
		I and iii.
		ii and iii.

1 point

QUESTION 25

If society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will

		shift rightward.
		not shift because the society moves from one point on the frontier to a point inside the frontier.
		not shift because the society moves from a point inside the frontier to a point on the frontier.
		shift leftward.

1 point

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Q3. The assumption of rational self-interest implies that people will choose to enrich themselves even if doing so violates the rights or property of others.

a. true

b. false

Q4. If you can earn $10 an hour as a retail clerk, $12 an hour as an office assistant, $16 an hour as a house painter, and $20 an hour repairing bicycles, what is your opportunity cost of working to repair bicycles?

a. $12 an hour

b. $10 an hour

c. $20 an hour

d. $16 an hour

Q5. In the graph of a production possibilities curve, both the horizontal and vertical axes measure the annual quantities of goods produced.

a. true

b. false

Q6. Scarcity arises because

a. international companies are slow to explore for new resources.

b. resources are finite and unable to meet all human wants and needs.

c. many countries waste goods because of inefficient political systems.

d. import taxes retard production.

Q7. A production possibilities curve with clothing and food on the axes shows which of the following?

I. A society cannot have an unlimited amount of each good.

II. For an efficient society, an increase in clothing production will necessitate a decrease in food production.

III. A society will always produce the maximum amount of both clothing and food.

a. II only

b. I only

c. III only

d. both I and II

Q8. All points on the production possibilities curve are efficient.

a. true

b. false

Q9. Economic growth can be pictured in a production possibilities curve diagram by

a. shifting the production possibilities curve out.

b. moving from right to left along the curve.

c. moving from left to right along the curve.

d. shifting the production possibilities curve in.

Q10. Suppose the current unemployment rate is 15 percent. If it rises to 20 percent,

a. the production possibilities curve will shift inward.

b. the economy will move closer to the production possibilities curve.

c. the economy will operate further inside the production possibilities curve.

d. the economy will move up along the production possibilities curve.

Q11. Clean air is a scarce resource.

a. true

b. false

Q12. Which of the following statements is FALSE?

a. A good is anything that gives satisfaction or happiness to individuals.

b. Wants may include humanitarian and altruistic goals.

c. Wants are unlimited and include all material and nonmaterial desires.

d. Economic goods are available in desired quantities at a zero price.

Q13. The current size of the U.S. labor force is less than 100 million workers.

a. true

b. false

Q14. The factors of production are

a. never as useful as people expect them to be.

b. valuable only because they are owned by corporations seeking to make a profit from them.

c. scarce resources.

d. abundant without limit on the planet.

Q15. Why do firms seek to use the least-cost combination of inputs?

a. because they won't be able to stay in business if they don't

b. because that is the combination that their employees prefer

c. because managers and supervisors find their jobs are easiest when the least-cost combination is used

d. because they want to keep costs low in order to appear to the media as a well-run business

Q16. Which one of the following best describes how economists view prices?

a. Low prices are good; high prices are bad.

b. High prices are good; low prices are bad.

c. The best price is a fair price.

d. Prices are signals of relative scarcity.

Q17. The person who creates a product innovation and brings it to market is providing the resource of

a. labor.

b. land.

c. entrepreneurship.

d. capital.

Q18. Gifts of nature used in the production process are considered

a. entrepreneurship.

b. labor.

c. land.

d. capital.

Q19. In a free market economy,

a. government decides what is produced, and producers decide who gets to consume it.

b. as a good becomes relatively more scarce, its price declines.

c. firms choose only to produce the most fashionable goods, regardless of the cost of production.

d. goods and services are allocated by a price system.

Q20. Resources are also known as

a. stocks, bonds, and other financial instruments.

b. minerals.

c. factors of production.

d. factories.

Q21. The size of the U.S. labor force has declined over the past 20 years as many jobs have been outsourced from the United States to other countries.

a. true

b. false

Q22. Which one of the following is TRUE?

a. The growth of the U.S. population over the next several decades will come from immigration.

b. Population growth makes a country poorer, because there are more mouths to feed.

c. Real per capita GDP can increase only if there is inflation.

d. Real per capita GDP can increase only if there is no inflation.

Q23. Which one of the following is FALSE?

a. The U.S. labor force will continue to grow through immigration.

b. Inflation stops economic growth.

c. Increased availability of reliable communication channels at lower and lower costs have led to companies relocating their manufacturing operations offshore.

d. The size of the U.S. labor force continues to grow despite many jobs being moved off-shore.

Q24. What is the purpose of a market system?

a. to facilitate efficient exchange

b. to encourage consumers to buy goods on credit

c. to ensure an equal distribution of income

d. to ensure that everyone is treated fairly

Q25. The market system is also called the price system because

a. people pay money in markets.

b. everything has a price tag.

c. rising prices are the signal to producers to make more of a particular good.

d. inflation is a disturbing problem.

Q26. Production refers to

a. any activity that causes a material conversion of an object.

b. any activity that results in the conversion of resources into goods and services that can be consumed.

c. any activity carried on by a firm, whether a corporation, partnership, or sole proprietorship.

d. physically producing material goods only.

Q27. An increase in the price of coffee, holding other things constant, will

a. decrease the demand for coffee.

b. increase the demand for coffee.

c. decrease the quantity of coffee demanded.

d. decrease the supply of coffee.

Q28. The supply curve shifts when the firm experiences a change in its production technology.

a. true

b. false

Q29. A surplus results when the quantity supplied exceeds the quantity demanded.

a. true

b. false

Q30. Table 3.1

Price per Constant-Quality Unit Quantity Demanded of Constant-Quality Units per Year Quantity Supplied of Constant-Quality Units per Year

$1.00 1,000 200

2.00 800 400

3.00 600 600

4.00 400 800

5.00 200 1,000

What condition characterizes a surplus?

a. Quantity supplied exceeds quantity demanded.

b. Quantity demanded exceeds quantity supplied.

c. Consumers are unhappy with the price.

d. Producers are unhappy with the price.

Q31. An increase in quantity demanded is caused by

a. an increase in income.

b. a decrease in the price of a complement.

c. a change in expectations about price in the future.

d. a decrease in the price of the good.

Q32. The demand curve is downward sloping because

a. price and quantity have a direct relationship.

b. price is always constant.

c. demand is based on supply.

d. price and quantity have an inverse relationship.

Q33. An increase in the price of one good will decrease the demand for a substitute good.

a. true

b. false

Q34. The market demand curve is the vertical summation of the demand curves of all the individuals in the market.

a. true

b. false

Q35. The equilibrium price of a good is a price that everyone is happy with.

a. true

b. false

Q36. Which one of the following would cause a rightward shift of the supply curve?

a. A new tax is imposed on production of the good.

b. Some firms that have been producing the good go out of business.

c. Firms producing the good find ways of lowering their production costs.

d. There is an increase in demand for the good.

Q37. Which of the following is a determinant of demand?

a. cost of production

b. number of suppliers

c. technology of production

d. income

Q38. The market demand curve for a particular good

a. will not be affected by any of the determinants of individual demand.

b. is the horizontal sum of each individual demand curve for the good.

c. will show a direct relationship between price and quantity demanded.

d. may be less than an individual demand curve for the good.

Q39. Table 4.4

Quantity of CDs Purchased Total Utility Marginal Utility

1 75

2 135

3 185

4 35

5 25

6 15

According to Table 4.4, what is the total utility when six CDs are purchased?

a. 65

b. 260

c. 120

d. 220

Q40. A rational consumer will never purchase a product when its

a. marginal utility is decreasing.

b. total utility is decreasing.

c. marginal utility is slightly positive.

d. marginal utility is negative.

Q41. The price elasticity of demand becomes relatively greater as more substitutes are easily available.

a. true

b. false

Q42. Which of the following statements is true with respect to total utility and marginal utility?

a. Marginal utility is always equal to total utility.

b. Total utility will always be negative when marginal utility is positive.

c. Total utility is minimized when marginal utility is zero.

d. Marginal utility can decline as total utility rises.

Q43. Table 4.3

Quantityof Soda Marginal Utility of Soda Quantityof Pizza Marginal Utility of Pizza

1 50 1 100

2 25 2 80

3 0 3 60

4 -25 4 40

After consuming what quantity of soda does the consumer in Table 4.3 experience diminishing marginal utility?

a. 2

b. 3

c. 1

d. 4

Q44. If the price elasticity of demand is 0.5, a 10 percent increase in the price will cause

a. the quantity demanded to decrease by 20 percent.

b. the quantity demanded to decrease by 50 percent.

c. the quantity demanded to increase by 50 percent.

d. the quantity demanded to decrease by 5 percent.

Q45. Which one of the following would make the demand for satellite subscription TV relatively less elastic?

a. The cost of administering the satellite service is lowered.

b. Cable TV service becomes less widely available.

c. Other networks of wireless entertainment become more widely available.

d. The cost of transmitting satellite signals is lowered.

Q46. A price increase will cause a relatively large drop in quantity demanded when

a. demand is perfectly inelastic.

b. the price elasticity of demand is 0.

c. there is very little time allowed for consumers to react.

d. the consumer has easy access to a number of substitute goods.

Q47. Table 4.6

Price Quantity Demanded

$20 90

$16 110

$12 130

$ 8 150

According to the data in Table 4.6, what is the elasticity of demand between a price of $20 and a price of $16?

a. 0.60

b. 0.75

c. 0.90

d. 1.25

Q48. Price elasticity of demand is the responsiveness

a. of the quantity demanded to changes in supply.

b. of the quantity demanded to changes in income.

c. of the quantity demanded to changes in price.

d. of the quantity demanded to changes in quantity.

Q49. Everyone who views the latest adventure movie in theaters will derive the same utility from seeing it.

a. true

b. false

Q50. The law of diminishing marginal utility asserts that total utility becomes negative when marginal utility begins to diminish.

a. true

b. false

ECO 211 Chapter Notes - Chapter 2: Marginal Cost, Opportunity Cost, Allocative Efficiency

ECO 211 Full Course Notes

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