Chapter 2: (Thinking Like An Economist) +question 2,4 Chapter 3

Chapter 2 :( Thinking Like An Economist)+question 2,4 chapter 3
Section A
1. The goal of an economist who formulates new theories is to

a. provide an interesting framework of analysis, whether or not the framework turns
out to be of much use in understanding how the world works.
b. provoke stimulating debate in scientific journals.
c. demonstrate that economists, like other scientists, can formulate testable theories.
d. contribute to an understanding of how the world works.
2. In the circular-flow diagram,

a. firms are buyers in the markets for goods and services.
b. households are sellers in the markets for the factors of production.
c. firms are sellers in the markets for factors of production and in the markets
for goods and services.
d. dollars that are spent on goods and services flow directly from firms to
households.
3. When constructing a production possibilities frontier, which of the following

assumptions is not made?
a. The economy produces only two goods or two types of goods.
b. Firms produce goods using factors of production.
c. The technology available to firms is given.
d. The quantities of the factors of production that are available are increasing
over the relevant time period.
4. Unemployment would cause an economy to

a. produce inside its production possibilities frontier.
b. produce on its production possibilities frontier.
c. produce outside its production possibilities frontier.
d. experience an inward shift of its production possibilities frontier.
5. The circular-flow diagram is a
a. visual model of how the economy is organized.
b. visual model of the relationships among money, prices, and businesses.
c. model that shows the effects of government on the economy.
d. mathematical model of how the economy works.
6. Production is efficient if the economy is producing at a point
a. on the production possibilities frontier.
b. outside the production possibilities frontier.
c. on or inside the production possibilities frontier.
d. inside the production possibilities frontier.
7. Here are some production possibilities for an imaginary economy for a given year.
Cars Newspapers
10 400
12 360
14 ?
If the production possibilities frontier is bowed outward, then in place of "?" we

might have
a. 340.
b. 330.
c. 320.
d. 310.
8. A production possibilities frontier can shift outward if

a. government increases the amount of money in the economy.
b. there is a technological improvement.
c. resources are shifted from the production of one good to the production of
the other good.
d. the economy abandons inefficient production methods in favor of efficient
production methods.
9. Jane produces only corn and cloth. Taking account of her preferences for corn and
cloth
a. makes her production possibilities frontier straighter.
b. makes her production possibilities frontier steeper.
c. makes her production possibilities frontier flatter.
d. does not affect her production possibilities frontier.
10. When resources are assigned to inappropriate tasks, that is, tasks for which they are
not the best match, the result will be producing at a point
a. where the slope of the PPF is positive.
b. where the slope of the PPF is zero.
c. inside the PPF.
d. outside the PPF.
11. Production Productio

Point of soda n
of pizza
A 40 0
B 28 3
C 20 5
D 12 7
E 0 10
Suppose that, for given resources and production technology, the above table is an
accurate description of the production relationship between soda and pizza. For the
sake of simplicity we assume the relationship is linear. Which of the following
production possibilities is not attainable?
a. 15 sodas, 5 pizzas
b. 40 sodas, 0 pizzas;
c. 5 sodas, 10 pizzas
d. All of the above possibilities are attainable.
12. Increasing opportunity cost is due to

a. firms’ needs to earn more and more profits.
b. ever increasing taxes.
c. the fact that it is more difficult to use resources efficiently the more society
produces.
d. the fact that resources are not equally suited for different types of
production.
Section B
Question 1
Why do economists use models in order to help explain how the economy works? Use a suitable
model to explain the interaction between the household and the business sectors.
- Because a model is a highly simplified representation of a more complicated reality.

- A suitable model is a circular-flow diagram
Question 2
Explain the concept of opportunity cost and discuss how it relates to the problem of choice between
scarce alternatives. Illustrate your answer using a suitable model.
- The opportunity cost of an item is what must be given up to obtain that item
-
Coca
shoes
Question 3
What generates economic growth? How does economic growth influence the production
possibilities frontier?
- Increases in capital goods, labor force, technology, and human capital

- Economic make the PPF shift outward
Question 4
The data in Table 1 below is for the small country of Murreyville.
Table 1
Combination Consumer goods Capital goods

A 200 0
B 180 90
C 150 170
D 110 240
E 60 300
F 0 350
i) Draw the production possibilities curve for Murreyville, with consumer goods on the x-axis
and capital goods on the y-axis. Label the production possibilities curve PPF.
ii) Can this economy produce 200 capital goods and 60 consumer goods and why?
Point G requires produce 200 capital goods and 60 consumer goods

 Possible but not efficient: could get more of either good w/o sacrificing any of the other
iii) Given PPF, what can you say about the economy of Murreyville if 120 capital goods and
150 consumer goods are being produced?
Point H still possible produce because point H inside in PPF
iv) A technological change occurs that enables Murreyville to produce 30% more capital goods.
Develop Table 2, with the new quantities of capital and consumer goods at combinations A
to F, as in Table 1, that Murreyville may produce given the technological change.
Table 2
Combination Consumer goods Capital goods

A 200 0
B 180/190 90/117
C 150/160 170/221
D 110/92 240/312
E 60 300/390
F 0 350/455
v) Given PPF, and assuming that the economy is producing at combination C, what is the
opportunity cost of producing 91 more units of capital goods?
125
- The opp. Cost of producing 91 more unit of capital goods is Tang ∝= =0,478
261
2. Explain how absolute advantage and comparative advantage differ.
- absolute advantage the ability to produce a good using fewer inputs than another producer
 comparing the productivity of one person, firm, or nation to that of another.
- comparative advantage the ability to produce a good at a lower opportunity cost than another produce
 when describing the opportunity costs faced by two producers

4. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using
the example in your answer to question 3
 based not on absolute advantage but on comparative advantage.
 Ruby has an absolute advantage in producing both meat and potatoes because she requires less time
than Frank to produce a unit of either good. Ruby needs to input only 20 minutes to produce an
ounce of meat, whereas Frank needs 60 minutes. Similarly, Ruby needs only 10 minutes to produce
an ounce of potatoes, whereas Frank needs 15 minutes. Thus, if we measure cost in terms of the
quantity of inputs, Ruby has the lower cost of producing potatoe
 In our example, Frank spends more time growing potatoes, and Ruby spends more time producing
meat. As a result, the total production of potatoes rises from 40 to 44 ounces, and the total
production of meat rises from 16 to 18 ounces. Frank and Ruby share the benefits of this increased
production

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Chapter 2 :( Thinking Like An Economist)+question 2,4 chapter 3

1. The goal of an economist who formulates new theories is to

2. In the circular-flow diagram,

3. When constructing a production possibilities frontier, which of the following

4. Unemployment would cause an economy to

If the production possibilities frontier is bowed outward, then in place of "?" we

8. A production possibilities frontier can shift outward if

11. Production Productio

12. Increasing opportunity cost is due to

- Because a model is a highly simplified representation of a more complicated reality.

- Increases in capital goods, labor force, technology, and human capital

Combination Consumer goods Capital goods

Point G requires produce 200 capital goods and 60 consumer goods

Point H still possible produce because point H inside in PPF

Combination Consumer goods Capital goods

2. Explain how absolute advantage and comparative advantage differ.

 comparing the productivity of one person, firm, or nation to that of another.

 when describing the opportunity costs faced by two producers

 based not on absolute advantage but on comparative advantage.

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