Book: Economics a contemporary introduction Chapter 2

Questions for Review 1. Opportunity Cost Discuss the ways in which the following 5. Production Possibilities Under what conditions is it possible conditions might affect the opportunity cost of going to a movie to increase production of one good without decreasing produc- tonight: tion of another good? a. You have a final exam tomorrow. 6. Production Possibilities Under what conditions would an b. School will be out for one month starting tomorrow. economy be operating inside its PPF? On its PPF? Outside c. The same movie will be on TV next week. its PPF? d. The Super Bowl is on TV tonight. 7. Shifting Production Possibilities In response to an influx of 2. Opportunity Cost Determine whether each of the following undocumented workers, Congress made it a federal offense to statements is true, false, or uncertain. Explain your answers: hire them. How do you think this measure affected the U.S. pro- a. The opportunity cost of an activity is the total value of all duction possibilities frontier? Do you think all industries were the alternatives passed up. affected equally? b. Opportunity cost is an objective measure of cost. 8. Production Possibilities "If society decides to use its resources c. When making choices, people carefully gather all avail- efficiently (that is, to produce on its production possibilities able information about the costs and benefits of alternative frontier), then future generations will be worse off because choices. they will not be able to use these resources." If this assertion d. A decision maker seldom knows the actual value of forgone is true, full employment of resources may not be a good thing. alternatives and therefore must make decisions based on ex- Comment on the validity of this assertion. pected values. 9. Economic Questions What basic economic questions must be 3. Comparative Advantage "You should never buy precooked answered in a barter economy? In a primitive economy? In a frozen foods because the price you pay includes the labor costs capitalist economy? In a command economy? of preparing food." Is this conclusion always valid, or can it be 10. Economic Systems What are the major differences between invalidated by the law of comparative advantage? a pure capitalist system and a pure command system? Is the 4. Specialization and Exchange Explain how the specialization United States closer to a pure capitalist system or to a pure com- of labor can increase productivity. mand system