1. Who has the lowest opportunity cost?

Maria and Felix need to decide which one of them will take time off of work to complete the rather urgent task of digging post holes for their new fence. Maria is pretty good with a post auger; she can dig the holes in 30 minutes. Felix is somewhat slow; it takes him 5 hours to dig the holes. Maria earns $160 per hour as a psychiatrist, while Felix earns $20 per hour as a cobbler. Keeping in mind that either Maria or Felix must take time off from work to dig the holes, who has the lowest opportunity cost of completing the task?

o o

Maria and Felix face identical opportunity costs Felix

'" @ Maria

Explanation:

If Maria decides to dig the holes, she gives up the $80 she could have earned working as a psychiatrist in the same 30 minutes. If Felix decides to dig the holes, he gives up the $100 he could have earned working as a cobbler in the same 5 hours. Since Maria gives up the least, she has the lowest opportunity cost of digging post holes for their new fence.

Scores:

.:. Average: 1 / 1

2. Understanding

opportunity

cost

You work as an assistant coach on the university basketball team and earn $15 per hour. One day, you decide to skip the hour-long practice and go to the movies instead, which has an $10 admission fee. The opportunity cost of skipping practice and going to the movies, valued in dollars, is
ExpLanation:

$25 '" .
CLose
A

When you measure the opportunity cost of a choice in dollars, you include any actual monetary amount paid (the explicit cost) and the monetary value of any other sacrifices made (the implicit cost). By skipping practice, you forgo earning your hourly wage of $15 per hour, so this is your implicit cost. You also choose to pay $10 to get into the movies, so this is your explicit cost. So your opportunity cost in dollars, the sum of your explicit and implicit costs, is $15 + $10 = $25.

Scores:

.:. Average: 1 /1

3. Efficiency in the production possibilities model Suppose the United Kingdom produces barley and cars. Its current production possibilities frontier (PPF) is shown on the diagram below, along with six output combinations labeled A through F.

CARS (Millions per year)

100

80
C

X 60

40
X
A

20
PPF

B E

20
BARLEY

40

X 60

80

100

[MiLLions ot bushels per year)

I Clear All II

Help

I
A and S only
Close /\.

Which of the points on the graph represent output combinations that are inefficient?
Explanation:

The production possibilities frontier shows all efficient output combinations for the United Kingdom; that is, combinations of output that use all the nation's available resources and technology to their maximum potential. Points located below the PPF, such as A and S, represent inefficient output combinations. At these points, it is possible to increase the production of both goods because resources are unemployed. For example, point A is inefficient because it is possible for the United Kingdom to produce instead at point F, where the economy is producing both more barley and more cars.

Which of the points on the graph represent output combinations that are efficient?
Explanation:

E and F only
Close /\.

The production possibilities frontier shows all efficient output combinations for the United Kingdom; that is, combinations of output that use all the nation's available resources and technology to their maximum potential. Points located on the PPF, such as E and F, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if the United Kingdom is currently producing at point F and decides that it wants to produce more barley, it must produce fewer cars.

Which ot the points on the graph represent output combinations that are unattainable?
Explanation:

C and D only
Close
A

The production possibilities frontier shows all efficient output combinations for the United Kingdom; that is, combinations of output that use all the nation's available resources and technology to their maximum potential. Points located above the PPF, such as C and D, represent output combinations that are unattainable given current resources and technology. Recall that each point on the PPFshows the maximum quantity of barley the United Kingdom can produce if it also wants to produce the given quantity of cars. For example, compare point F (40 million cars and 40 million bushels of barley) with point D (40 million cars and 66 million bushels of barley). Because point F is on the United Kingdom's PPF,we know that if the United Kingdom is producing 40 million cars, it can produce at most 40 million bushels of barley; therefore, point D must be unattainable given current resources and technology.

Scores:

.:. Average: 3/3

4. The opportunity

cost of shifting production

choices

19

The graph below shows the production possibilities frontier (PPF) of an economy that produces food and oil. The black points (X symbols) represent three possible output levels in a given month. You can place your mouse over the points to see their exact coordinates.

FOOD [Thousands of pounds per month)

40 35 30 25 20 15 10 5
A
)( )(

B C
)(

20

40

60

80

100

120

140

160

OIL (Thousands of barrels per month)

I Clear All I ~

Suppose the economy initially produces 29,000 pounds of food and 20,000 barrels of oil, which is represented by point A. The opportunity cost of producing an additional 20,000 barrels of oil (that is, moving production to point B) is 2,000 pounds of food.

Suppose instead that the economy currently produces 40,000 barrels of oil and 27,000 pounds of food, which is represented by point B. Now the opportunity cost of producing an additional 20,000 barrels of oil (that is, moving to point C) is 3,000 pounds of food.

Comparing your answers to the two questions above, you can see that the opportunity cost of 20,000 additional barrels of oil at point B is reflects the
Explanation:

>/ the opportunity cost of 20,000 additional barrels of oil at point A. This law of increasing opportunity costs >/.
greater than
Close
A

At point A, the economy produces 29,000 pounds of food and 20,000 barrels of oil. At point B, the economy produces 27,000 pounds of food (2,000 fewer pounds than at point A) and 40,000 barrels of oil (20,000 more barrels than at point A). Therefore, at point A, the opportunity cost of 20,000 additional barrels of oil is 2,000 pounds of food. At point S, the economy produces 27,000 pounds of food and 40,000 barrels of oil. At point C, the economy produces 24,000 pounds of food (3,000 fewer pounds than at point S) and 60,000 barrels of oil (20,000 more barrels than at point B). Therefore, at point B, the opportunity cost of 20,000 additional barrels of oil is 3,000 pounds of food. Since the opportunity cost of 20,000 additional barrels of oil starting at point A is 2,000 pounds of food, and the opportunity cost of 20,000 additional barrels of oil starting at point B is 3,000 pounds of food, the opportunity cost of oil at point B is greater than the opportunity cost of oil at point A. This reflects the fact that in general, not all resources are equally well suited to the production of food and oil. When the economy starts producing oil, it uses those resources that are most suited to oil production as opposed to food production. If this economy wants to produce additional oil, it must start using resources that aren't as well suited to oil production; so the opportunity cost of the additional barrels of oil is higher than the cost of the initial barrels of oil. Therefore, the opportunity cost of producing additional oil increases as more oil is produced, giving the PPFits familiar bowed-out shape.

Scores:

.: Average: 4 /4

5. Shifts in production possibilities Suppose the United Kingdom produces both agricultural and capital goods. The diagram below shows its current production possibilities frontier (PPF)for alfalfa, an agricultural good, and trucks, a capital good. Drag the PPFto show the effects of a tightening of immigration laws to allow fewer workers into the country. Tool tip: Position your cursor over any dots outlined in red and drag to the desired position. Dots will snap to their new position.

Answer
TRUCKS
IThoLJsands per year)

TRUCKS
(Thousands per year)

30

30

20

20 '

10

10

II C.
o
20

L'o-l _
40
[Millions

I
60 ALFALFA
of bLJshels per yeaI'I

lR'_
20

I
40 60

ALFALFA
[Millions of bLJshels per yeaI'I

Explanation:

Close

Becauseof the tightening of immigration laws, less labor is available for the production of either alfalfa or trucks. This decreases the maximum amount of alfalfa the United Kingdom can produce for any given quantity of trucks, and decreases the maximum number of trucks it can produce for any given quantity of alfalfa. For instance, if we look at the vertical axis, we can see that if the United Kingdom produces zero bushels of alfalfa, it can initially produce a maximum of 20,000 trucks per year. Becausethe tightening of immigration laws decreases the amount of trucks the United Kingdom can produce, you should have moved the point to 10,000 trucks per year. Similarly, if we look at the horizontal axis, we can see that if the United Kingdom produces zero trucks, it can initially produce a maximum of 40 million bushels of alfalfa per year. Because the tightening of immigration laws decreases the amount of alfalfa the United Kingdom can produce, you should have moved the point to 20 million bushels of alfalfa per year.

Scores:

.: Average: 1 / 1

6. Opportunity cost and production possibilities

19
from various possible combinations of his time.

who is able to produce both boats and puzzles. He has eight hours a day to produce resulting

table shows the daily output

Hours per Day Choice

Hours per Day Producing Puzzles 0

Boats Produced per Day 4 3 2 1

Puzzles Produced per Day 0

Producing Boats 8 6 4 2 0

2
4 6 8

12
19

C
D E

21
22

On the following

diagram,

use the red points (cross symbol) to plot Nathan's initial production

possibilities

frontier

(PPF). Plot your points in order, either from left to right or right to left. Line segments will connect the points automatically.
Answer PUZZLES PER DAY Initial PPF PUZZLES PER DAY

40 35 30 25 20 15 0 10 5

40

New PPF

"

35 30 25

<ll

0 0

20 15

0 0

0 10 5

-:>
0 2 3 4

0 8
IClearAlll~

0 8

BOATS PER DAY

BOATS PER DAY

Explanation: Each row of the table refers to one point on the production spend all of his time producing his initial PPF. Similarly, possibilities frontier. For example,

Close '" if Nathan chooses to

boats, then he can produce 4 boats and no puzzles; so (4, 0) is one of the points on boats and puzzles, he will produce 2 boats and

if he splits his time evenly between producing

19 puzzles; so (2, 19) is another point on his initial PPF.

Suppose Nathan is currently

choosing combination 2 puzzles per

D, producing

1 boat per day. What is his opportunity

cost of

producing a second boat per day?

day"
C, producing 2 boats per day. What is his opportunity cost of

Now suppose Nathan is currently producing a third boat per day?

choosing combination 7 puzzles per day

As Nathan increases his production of boats, his opportunity cost of producing one more boat increases
Explanation:

".
Close /'\

At combination D, Nathan is producing 1 boat and 21 puzzles each day. Producing a second boat each day would require him to move to combination C, reducing his production of puzzles to 19 per day. Since this change involves producing 21 - 19 per day. SimilarlYI at combination C, Nathan is producing 2 boats and 19 puzzles each day. Producing a third boat each day would require him to move to combination 81 reducing his production of puzzles to 12 per day. Since this change involves producing 19 - 12 puzzles per day. Nathan's opportunity cost of producing the second boat per day is 2 puzzles per day, while the opportunity cost of producing the third boat per day is 7 puzzles per day. Hence, as Nathan increases his production of boats, his opportunity cost of producing more boats increases. This reflects the law of increasing opportunity costs.
== ==

2 fewer puzzles per day, the opportunity cost of producing the second boat per day is 2 puzzles

7 fewer puzzles per day, the opportunity cost of producing the third boat per day is 7

Suppose Nathan buys a new tool that allows him to produce twice as many boats per hour as before, but doesn't affect his ability to produce puzzles. Use the blue points (circle symbol) to plot his new PPFon the diagram above. Because he can now make more boats per hour, Nathan's opportunity cost of producing puzzles is higher than"
Explanation:

it was previously.
Close /'\

The new tool causes Nathan's PPFto pivot to the right. In other words, for each point on his PPF,the vertical coordinate is the same as before, but the horizontal coordinate is twice its initial value. For example, consider combination D, in which Nathan spends 2 hours producing boats and 6 hours producing puzzles. Before he bought the new tool, he could have produced 1 boat and 21 puzzles, so (1, 21) was a point on his initial PPF.With the new tool, the same allocation of time results in 2 boats and 21 puzzles, so (2, 21) is a point on his new PPF. The shift in Nathan's PPFis reflected in a corresponding change in his opportunity costs. Again, consider combination D, and consider the effects of moving from there to combination E. 80th before and after Nathan buys the tool, he can produce 21 puzzles if he devotes 6 hours to producing them, and 22 puzzles if he devotes 8 hours to producing them. Hence, spending his last 2 hours producing puzzles results in 1 additional puzzle. Before he bought the tool, that would have meant giving up 1 boat; but now that he has the tool, it means giving up 2 boats. Therefore, Nathan's increased ability to produce boats increases his opportunity cost of producing puzzles.

Scores:

.:. Average: 6/6

7. Economic growth and PPFs

Wilshire, while the red curve shows the PPF for Wilshire next year if the economy were to operate at point B today.

CONSUMPTION

GOODS

- ->.c
-- .. -----X
I I I I
I

B
I I I I

PPF
Next Year

- -1- - - - -

r - -~ C
I I I PPF I Today

I I

CAPITAL GOODS

Suppose that this year, the economy is operating production of either capital goods or consumption

at point B, and a technological

advance occurs that enables greater graph, the PPF

goods with the same resources. On the following PPF3 (green line)

that best describes the Wilshire economy next year is the same as on the graph above.)

. (Note: The blue and red PPFs are

CONSUMPTION

GOODS

PPF TodilY

PPFl

I PPF2
CAPITAL

'-GOODS

PPF3

Explanation:

Close

An economy faces the tradeoff between current production of consumption goods and current production of capital goods. The more resources an economy devotes to producing consumption goods, the higher the standard of living now, but the fewer capital goods it can produce today. Greater capital, however, is one of the major sources of economic growth. Therefore, you can expect an otherwise identical economy to grow more quickly when it produces more capital. Becausecapital is itself a resource, this economy will have more resources in the future as a result of the technological innovation. Therefore, the appropriate PPFis the one further out than the red PPF,namely PPF3 .

Scores:

:. Average:

1/ 1

8. Specialization and production possibilities

19

Suppose France produces only cars and trucks. 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 each good. The graphs below show two possible PPFsfor France's economy, a straight line PPF(PPF1)and a bowed out PPF (PPF2)' Graph 1 Graph 2

TRUCKS

TRUCKS

PPFl

PPF2

CARS

CARS

Based on the above description, the tradeoff France faces between producing trucks and cars is best represented by Graph 1 The shape of the PPFreflects the fact that as France produces more cars and fewer trucks, the opportunity cost of producing each additional car
Explanation:

remains constant../

.
Close
A

You are told in this problem that the same set of resources is equally useful in producing each good. Thus, if France decides to produce more cars and fewer trucks, the resources that it uses to produce the additional cars will be as well suited to the production of cars as the resources already being used in car production. Therefore, the opportunity cost of producing each additional car remains constant as more cars are produced. The opportunity cost of producing cars is reflected in the slope of the PPF.If the PPFis flatter, producing an additional car requires giving up fewer trucks. If the PPFis steeper, producing an additional car requires giving up more trucks. In this case, because the opportunity cost of producing additional cars remains constant as more resources are shifted to the production of cars, the slope of the PPFmust remain constant as France produces more trucks and fewer cars. Therefore, the tradeoff France faces between producing trucks and cars is best represented by Graph 1.

9. Comparative and absolute advantage Nathan and Ginny run a catering business in which they have two major tasks: getting new clients and preparing food for events and parties. It takes Nathan 12 hours to prepare the food for an event and 3 hours of effort to get each new client. For Ginny, it takes 8 hours to prepare food for an event and 4 hours to get a new client. In this scenario, Ginny" has an absolute advantage in food preparation, and __ G_in_n_y __ has a comparative

advantage in food preparation.

Ginny has an absolute advantage in food preparation because she can do it in less time (8 hours) than Nathan can (12 hours). Ginny also has a comparative advantage in food preparation, because her opportunity cost of preparing food for one more event (2 new clients) is lower than Nathan's opportunity cost of preparing food for one more event (4 new clients).

Suppose that initially, Nathan and Ginny are both splitting both tasks for a large number of events. Then they decide to start shifting some work according to the principle of comparative advantage. In particular, the person with the comparative advantage in food preparation will take over preparing food for one more event, and the other person will use the freed-up time to get more clients. As a result, the total number of events for which food is prepared will remain unchanged, but the number of new clients will increase by
Explanation:

2 "

.
Close /\.

When Ginny (who has a comparative advantage in food preparation) takes over preparing food for one event, she has to shift 8 hours away from getting clients. This causes Ginny to attract 2 fewer clients. But by freeing Nathan from having to prepare food for one event, Nathan can shift 12 hours to getting new clients. Because it takes Nathan 3 hours to get a new client, in 12 hours he can get 4 new clients. Thus, Ginny gets 2 fewer clients, but Nathan gets 4 more clients. In the end, new clients increase by 4 - 2

2.

Scores:

Average: 3/3

10. Comparative advantage Jamal and Karen are farmers. Each one owns a 10-acre plot of land. The table below shows the amount of alfalfa and corn each farmer can produce per year on a given acre. Both farmers can choose whether to devote all 10 acres to producing alfalfa, devote all 10 acres to producing corn, or produce alfalfa on some of their land and corn on the rest.

Alfalfa (Bushels per acre) Jamal Karen

Corn (Bushels per acre) 5 4

20 12

On the following diagram, use the red line (cross symbols) to plot Jamal's production possibilities frontier (PPF), and use the blue line (circle symbols) to plot Karen's PPF.

Answer ALFALFA [Bushels per year) ALFALFA [Bushels per year] Jamal's PPF 300

300
250

250 Karen's PPF

200

200

'0

150

150

o
100 100

50 o
;:> 50

50

o
60 70 80

10

20

30

40

10

20

30

40

;:> 50

60

70

80

CORN IBushels per year]

lClear All J lHelp

CORN [Bushels per year!

Explanation:

Close

From the table above, you can see that if Jamal devotes all 10 acres to producing alfalfa, then he can produce 10 acres x 20 bushels per acre from (0, 200) to (50, 0). Similar calculations for Karen show that if she devotes all of her land to producing alfalfa, then she can produce 120 bushels of alfalfa per year. On the other hand, if she uses all 10 acres to produce corn, then she can produce 40 bushels of corn per year. Therefore, her PPFextends from (0, 120) to (40, 0). Notice that both PPFsare linear because there is a constant tradeoff between the two goods.
=

200 bushels of alfalfa per year. On the other hand, jf he uses all 10 acres to produce

corn, then he can produce 10 acres x 5 bushels per acre

50 bushels of corn per year. Therefore, his PPFextends

Jamal

has an absolute advantage in the production of alfalfa and

Jamal

has an absolute advantage In

the production of corn.

Someone 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 we are considering is land. Jamal needs 1/20 of an acre to produce a bushel of alfalfa, and Karen needs 1/12 of an acre to produce the same amount. Therefore, Jamal has an absolute advantage in the production of alfalfa. Likewise, Jamal needs 1/5 of an acre to produce a bushel of corn, and Karen needs 1/4 of an acre to produce the same amount. Therefore, Jamal has an absolute advantage in the production of corn.

Jamal's opportunity cost of producing 1 bushel of corn is cost of producing 1 bushel of corn is of producing corn than Karen, Karen 3 bushels of alfalfa

4 bushels of alfalfa

, whereas Karen's opportunity higher opportunity cost Jamal

. Because Jamal has a

has a comparative advantage in the production of corn and

has a comparative advantage in the production of alfalfa.

For each acre Jamal uses to produce corn, he produces 5 bushels of corn per year. But using that acre to produce corn means he must forgo the 20 bushels of alfalfa he could have produced on that land. Therefore, Jamal's opportunity cost of producing 5 bushels of corn is 20 bushels of alfalfa, so the opportunity cost of producing each bushel of corn is 20 bushels of alfalfa / 5 bushels of corn slope of Jamal's PPFis -4.) By the same logic, Karen could use an acre of land to produce either 4 bushels of corn or 12 bushels of alfalfa, so her opportunity cost of producing corn is 12 bushels of alfalfa / 4 bushels of corn = 3 bushels of alfalfa per bushel of corn. (Again, note that the slope of Karen's PPFis -3.) Someone has a comparative advantage in producing a good if they can produce it at a lower opportunity cost than someone else. In this case, Jamal has a higher opportunity cost of producing corn than Karen, so Karen has a comparative advantage in the production of corn. Note that the opposite is true of alfalfa: repeating the calculations above, we can see that Jamal's opportunity cost of producing a bushel of alfalfa is 1/4 bushel of corn, and Karen's opportunity cost of producing a bushel of alfalfa is 1/3 bushel of corn. Therefore, Jamal has a comparative advantage in the production of alfalfa. Note 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 both goods. Since Karen has a lower opportunity cost of producing corn than Jamal, it must be the case that Jamal has a lower opportunity cost of producing alfalfa than Karen.

4 bushels of alfalfa per bushel of corn. (Note also that the

Scores:

.: Average: 9 /9