Exhibit 2-7 85. Refer to Exhibit 2-7. Which of the following statements is true? a. Points B and D are more efficient than points A and C. b. If the economy's PPF is represented by PPF1, points A and B are productive efficient, while C and D are unattainable. c. If the economy's PPF is represented by PPF2, points C and D are productive efficient, while A and B are unattainable. d. both a and c ANS: B 86. Refer to Exhibit 2-7. For which of the following is the statement "In order to get more civilian goods, we have to forfeit some military goods" true? a. a movement from A to C b. a movement from B to D c. a movement from C to D d. a movement from F to D e. none of the above ANS: C 87. Refer to Exhibit 2-7. Point F is a. unattainable if the economy's PPF is PPF1. b. inefficient if the economy's PPF is PPF2. c. attainable if the economy's PPF is PPF2. d. all of the above e. none of the above ANS: D 88. Refer to Exhibit 2-7. For which of the following is the statement “In order to get more military goods, we have to forfeit some civilian goods” true? a. a movement from A to C b. a movement from B to D c. a movement from F to D d. a movement from B to A e. none of the above ANS: D 89. The economy can produce 15X and 15Y, 10X and 20Y, 5X and 25Y, or OX and 30Y. It follows that the production possibility frontier (PPF) is a. a downward-sloping straight line. b. an upward-sloping straight line. c. a downward-sloping convex curve. d. a downward-sloping concave curve. ANS: A 90. If the economy is on the production possibilities frontier (PPF), the economy is a. productive inefficient. b. operating with no unemployed resources. c. productive efficient. d. b and c e. none of the above ANS: D 91. Points inside (below) the production possibilities frontier (PPF) are a. unattainable. b. attainable, but productive inefficient. c. preferable to points that lie on the PPF. d. attainable and productive efficient. ANS: B 92. The economy can produce 15X and 15Y, 10X and 20Y, 5X and 25Y, or 0X and 30Y. It follows that opportunity cost of 1X is ___Y. a. 4.0 b. 5.0 c. 2.5 d. 1.0 e. none of the above ANS: D 93. If an economy can produce a maximum of 100 units of good X and the opportunity cost of 1X is always 5Y, then what is the maximum number of units of good Y the economy can produce? a. 250 b. 100 c. 20 d. 500 e. none of the above ANS: D 94. If an economy can produce a maximum of 10 units of good X and the opportunity cost of 1X is always 2Y, then what is the maximum units of good Y the economy can produce? a. 5 b. 200 c. 20 d. 500 e. none of the above ANS: C 95. An economy can produce either of these two combinations of goods X and Y: 1,000X and 0Y or 400Y and 0X. Furthermore, the opportunity cost between the two goods is always constant. Which of the following combinations of the two goods, X and Y, is it possible for the economy to produce? a. 700X, 280Y b. 600X, 250Y c. 400X, 150Y d. 100X, 600Y e. 300X, 280Y ANS: A 96. If there is always a 4-for-1 tradeoff between producing good X and good Y, it follows that the opportunity cost of X (in terms of Y) ____________________ and the PPF for these two goods is ______________________. a. decreases at low levels of X; a straight line b. rises at high levels of Y; bowed-outward c. decreases at high levels of X; bowed-outward d. is always the same; a straight line ANS: D 97. The economy is currently on its production possibilities frontier (PPF). A politician says that it is possible to get more of everything---more infrastructure, more schools, more national defense, more spending on social programs, and so on. The politician is a. correct if he is assuming a rightward-shifting PPF. b. incorrect if he is assuming a rightward-shifting PPF. c. incorrect if he is assuming a PPF that does not change. d. correct if he is assuming a PPF that does not change. e. a and c ANS: E 98. The law of increasing opportunity costs states that as a. less of a good is produced, the higher the opportunity costs of producing that good. b. more of a good is produced, the lower the opportunity costs of producing that good. c. more of a good is produced, the higher the opportunity costs of producing that good. d. more of a good is produced, the opportunity cost of producing the good remains the same. e. a and b ANS: C 99. Currently an economy is producing (at a point on its production possibilities frontier) 100 units of good X and the opportunity cost of producing 1X is 3Y. If good X is produced at increasing opportunity costs, then when the economy produces 120 units of good X (on the same PPF) the opportunity cost of producing 1Y (not 1X) could be a. 1/4X. b. 1/3X. c. 1/2X. d. 1X. e. none of the above ANS: A 100. What is the reason for the law of increasing opportunity costs? a. There is no reason: it is just one of the laws of economics. b. Resources have varying abilities and those with lower opportunity costs of producing a good will be used to produce it before resources with higher opportunity costs produce it. c. The price of a good rises as more of it is demanded. d. As more of a good is produced, the taxes applied to the production of the good rise. e. c and d ANS: B 101. If a production possibilities frontier (PPF) is concave outward, it follows that a. opportunity costs are constant between two goods. b. the opportunity cost (of producing the good on the horizontal axis) rises as more of the good is produced. c. the opportunity cost (of producing the good on the horizontal axis) falls as more of the good is produced. d. the opportunity cost (of producing the good on the horizontal axis) first rises and then falls as more of the good is produced. e. none of the above ANS: B 102. If the law of increasing opportunity costs is operable, and currently the opportunity cost of producing the 101st unit of good X is 5Y, then the opportunity cost of producing the 201st unit of good is X is most likely to be a. less than 5Y. b. more than 1/5Y but less than 5Y. c. more than 5Y d. less than 1/5Y but more than zero. ANS: C 103. If the law of increasing opportunity costs is operable, and currently the opportunity cost of producing the 1,000th unit of good X is 0.5Y, then the opportunity cost of producing the 2,001st unit of good is X is most likely to be a. less than 0.5Y. b. more than 0.5Y but less than 2Y. c. more than 0.5Y d. less than 0.5Y but more than zero. e. none of the above ANS: C 104. Which scenario below most accurately describes the process by which a technological change can affect employment patterns across industries? a. A technological advance makes it possible to produce more of good X with less labor. As a result, labor is released from producing good X. Some of this labor ends up producing goods Y and Z. b. A technological advance makes it possible to produce less of good X with less labor. As a result, labor is released from producing good X. Some of this labor ends up producing good Y. c. A technological advance makes it possible to produce more of good X with more labor. As a result, more labor is needed to produce good X. There is less labor available to produce goods Y and Z. d. A technological advance makes it possible to produce more of good X with less labor. As a result, labor becomes more important to the production of good X. More labor ends up producing good X. e. none of the above ANS: A 105. The economy was at point A producing 100X and 200Y. It moved to point B where it produces 200X and 300Y. It follows that a. point A may have been a point below the economy's PPF, while point B may lie on the PPF. b. the economy's PPF could have shifted outward and point A was a point on the economy's old PPF. c. the economy has moved from one point on its PPF to another point on the same PPF. d. a or b e. a or c ANS: D 106. If an economy is operating on its production possibilities frontier (PPF), are there any unemployed resources in the economy? a. Yes, because if there weren't any unemployed resources the economy would be producing beyond its PPF. b. No, because if there were any unemployed resources the economy would be producing below its PPF. c. It depends on whether the economy's PPF is a concave (downward-sloping) curve or a straight line. d. Yes, because there are always some natural resources that are unemployed. e. The answer is "yes," but not for any of the reasons specified in answers a through d. ANS: B 107. Productive efficiency implies a. the possibility of gains in one area without losses in another. b. that more output has been produced. c. the impossibility of gains in one area without losses in another. d. that prices are stable. e. c and d ANS: C 108. An economy can produce the following combinations of goods: 50X and 0Y, 40X and 10Y, 30X and 20Y, 20X and 30Y, 10X and 40Y, and 0X and 50Y. The production possibilities frontier (PPF) for the economy is a. concave downward because the opportunity cost of producing the 10th unit of Y is greater than the opportunity cost of producing the first unit of Y. b. a straight (downward-sloping) line because the opportunity cost of producing the two goods is constant. c. concave downward because the opportunity cost of producing the 40th unit of Y is less than the opportunity cost of producing the 10th unit of Y. d. a straight (downward-sloping) line because the opportunity cost of producing the 10th unit of X is greater than the opportunity cost of producing the 40th unit of X. e. a straight (downward-sloping) line because the opportunity cost of producing the 30th unit of Y is greater than the opportunity cost of producing the 30th unit of X. ANS: B 109. Which of the following is not true about production possibilities frontiers? a. moving from one point to another on a PPF incurs a tradeoff b. economic growth is shown by shifting the PPF outward c. unemployment of resources is shown by shifting the PPF inward d. a PPF can shift inward or outward ANS: C 110. Country X has a high unemployment rate. It follows that country X is operating a. beyond its production possibilities frontier (PPF). b. on its PPF. c. inside (below) its PPF. d. at a productive efficient point. e. b and d ANS: C 111. Country 1 produces two goods, A and B. Country 2 produces the same two goods. Currently, country 1 produces 100A and 200B and country 2 produces 300A and 700B. Which of the following statements is true? a. If country 1 is on its production possibilities frontier, then country 2 must be on its PPF, too. b. The PPF for country 1 is necessarily closer to the origin (or further to the left) than the PPF for country 2. c. If country 1 is productive inefficient, then so is country 2. d. Country 2 is operating on its PPF, but country 1 is clearly not operating on its PPF. e. none of the above ANS: E 112. If Sean can bake bread at a lower opportunity cost than Jason, and Jason can produce paintings at a lower opportunity cost than Sean, it follows that a. Sean has a comparative advantage in paintings and Jason has a comparative advantage in baking bread. b. Both Sean and Jason have a comparative advantage in baking bread. c. Both Sean and Jason have a comparative disadvantage in producing paintings. d. Sean has a comparative advantage in baking bread and Jason has a comparative advantage in producing paintings. e. There is not enough information to answer the question. ANS: D 113. Carlos can produce the following combinations of X and Y: 10X and 10Y, 5X and 15Y, and 0X and 20Y. The opportunity cost of one unit of X for Carlos is a. 1 unit of Y. b. 2 units of Y. c. 1/2 unit of Y. d. 1/4 unit of Y. e. none of the above ANS: A 114. Keisha can produce the following combinations of X and Y: 100X and 20Y, 50X and 30Y, or 0X and 40Y. The opportunity cost of one unit of Y for Keisha is a. 5 units of X. b. 0.2 units of X. c. 3 units of X. d. 1/2 unit of X. e. none of the above ANS: A 115. Michael can produce the following combinations of X and Y: 10X and 10Y, 5X and 15Y, and 0X and 20Y. Vernon can produce the following combinations of X and Y: 100X and 20Y, 50X and 30Y, or 0X and 40Y. It follows that a. Michael has the comparative advantage in producing X and Vernon has the comparative advantage in producing Y. b. Michael has the comparative advantage in producing Y and Vernon has the comparative advantage in producing X. c. Neither Michael nor Vernon has a comparative advantage in producing X. d. Neither Michael nor Vernon has a comparative advantage in producing Y. e. There is not enough information to answer the question. ANS: B 116. A person has a comparative advantage in the production of a good when they can produce the product at a(n) ________ opportunity cost compared to another person. a. b. c. d. higher increasing lower equal ANS: C 117. Between 1910 and today, the number of farmers in the United States _____________ dramatically as a result of ___________________ in farming in the twentieth century. a. dropped; technological improvements b. rose; technological improvements c. dropped; technological declines d. rose; technological declines ANS: A 118. Suppose Andrea is taking just two courses and is at a point on her PPF of grades for those two courses. Now this PPF shifts inward and Andrea moves to a point on the new PPF. Then it is impossible for a. both of her grades to fall. b. both of her grades to rise. c. one of her grades to rise and the other grade to fall. d. one of her grades to fall while the other grade stays constant. ANS: B 119. Suppose Andrea is taking just two courses and is at a point inside her PPF of grades for those two courses. If Andrea changes her work habits then it is impossible for a. either one of her grades to rise. b. both of her grades to rise. c. both of her grades to fall. d. either one of her grades to rise while the other grade remains constant. e. none of the above is impossible in this situation ANS: E 120. The PPF between goods X and Y will be a downward-sloping a. straight line if increasing opportunity costs exist. b. straight line if decreasing opportunity costs exist. c. curve that is bowed inward if increasing opportunity costs exist. d. straight line if constant opportunity costs exist. ANS: D Exhibit 2-8 Maria Good X Good Y 90 0 60 30 30 60 0 90 Maya Good X Good Y 60 0 40 10 20 20 0 30 121. Refer to Exhibit 2-8. Who has the comparative advantage in the production of good X? a. Maria b. Maya c. Both Maria and Maya d. Neither Maria nor Maya ANS: B 122. Refer to Exhibit 2-8. Who has the comparative advantage in the production of good Y? a. Maria b. Maya c. Both Maria and Maya d. Neither Maria nor Maya ANS: A 123. Refer to Exhibit 2-8. If Maria and Maya each specialize in the good in which she has a comparative advantage and then engage in trade, ____________________ can consume a combination of goods that lies beyond her PPF. a. Maria, but not Maya, b. Maya, but not Maria, c. both Maria and Maya d. neither Maria nor Maya ANS: C 124. Refer to Exhibit 2-8. For Maya, the opportunity cost of producing one unit of good X is ___________ unit(s) of good Y. a. 2.00 b. 1.00 c. 10.00 d. 0.50 ANS: D 125. Refer to Exhibit 2-8. For Maria, the opportunity cost of producing one unit of good X is ___________ unit(s) of good Y. a. 2.00 b. 1.00 c. 10.00 d. 0.50 ANS: B 126. Refer to Exhibit 2-8. For Maya, the opportunity cost of producing one unit of good Y is ___________ unit(s) of good X. a. 2.00 b. 1.00 c. 10.00 d. 0.50 ANS: A 127. Refer to Exhibit 2-8. For Maria, the opportunity cost of producing one unit of good Y is ___________ unit(s) of good X. a. 2.00 b. 1.00 c. 10.00 d. 0.50 ANS: B Exhibit 2-9 Alex Good A 0 25 50 75 100 Adam Good B 300 225 150 75 0 Good A 0 30 60 90 120 Good B 160 120 80 40 0 128. Refer to Exhibit 2-9. Who has the comparative advantage in the production of good A? a. Alex b. Adam c. Both Alex and Adam d. Neither Alex nor Adam ANS: B 129. Refer to Exhibit 2-9. Who has the comparative advantage in the production of good B? a. Alex b. Adam c. Both Alex and Adam d. Neither Alex nor Adam ANS: A 130. Refer to Exhibit 2-9. If Alex and Adam each specialize in the good in which he has a comparative advantage and then engage in trade, ____________________ can consume a combination of goods that lies beyond his PPF. a. Alex, but not Adam, b. Adam, but not Alex c. Alex and Adam d. neither Alex nor Adam ANS: C 131. Refer to Exhibit 2-9. For Alex, the opportunity cost of producing one unit of good A is ____________ unit(s) of good B. a. 3.00 b. 0.33 c. 0.75 d. 1.33 ANS: A 132. Refer to Exhibit 2-9. For Alex, the opportunity cost of producing one unit of good B is ____________ unit(s) of good A. a. 3.00 b. 0.33 c. 0.75 d. 1.33 ANS: B 133. Refer to Exhibit 2-9. For Adam, the opportunity cost of producing one unit of good B is ____________ unit(s) of good A. a. 3.00 b. 0.33 c. 0.75 d. 1.33 ANS: C 134. Refer to Exhibit 2-9. For Adam, the opportunity cost of producing one unit of good A is ____________ unit(s) of good B. a. 3.00 b. 0.33 c. 0.75 d. 1.33 ANS: D TRUE/FALSE 1. A decrease in unemployment causes the PPF to shift outward (to the right). ANS: F 2. The law of increasing opportunity cost results from the varying ability of resources to adapt to the production of different goods and it helps to explain why production possibilities curves are typically bowed outward. ANS: T 3. Production possibilities curves can shift outward but they do not shift inward. ANS: F 4. Productive efficiency implies that more of one good can not be produced without a loss of production of the other good. ANS: T 5. If the PPF for two goods is a downward-sloping straight line, the resources used to produce those goods are equally well suited to the production of both goods. ANS: T 6. It is possible for one person to have a comparative advantage in the production of both goods being produced. ANS: F 7. A decrease in the quantity of resources available causes a movement down along a given PPF. ANS: F 8. The law of increasing opportunity cost helps to explain why PPF’s are typically bowed-outward. ANS: T 9. In a PPF graph of goods X and Y, points that lie beyond (to the right of) the PPF represent combinations of the two goods that are currently unattainable. ANS: T 10. A production possibilities frontier separates an attainable region from an unattainable region. ANS: T 11. It is possible through trade for a country to consume a combination of goods that lies beyond its production possibilities frontier. ANS: T 12. When an economy is not using all of its resources, it is producing at a point below its production possibilities frontier. ANS: T ESSAY 1. Give a definition of an advance in technology. Suppose that you are drawing a PPF for civilian goods and military goods, describe the effect on the PPF of an advance in technology in both civilian goods and military goods. How would the impact on the PPF be different if the technological improvement only helped in the production of military goods, but not civilian goods? ANS: An advance in technology commonly refers to the ability to produce more output with a fixed amount of resources (or the same amount of output with a smaller amount of resources). When technology advances in the production of both products the PPF shifts outward. When technology advances in the production of military goods, but not civilian goods, the PPF shifts outward along the axis for military goods and the intercept remains constant along the axis for civilian goods. 2. Why is the production possibilities frontier (PPF) typically bowed-outward? Under what circumstances would the PPF be a straight line? ANS: The PPF is typically bowed-outward due to the law of increasing opportunity costs. As more of a product is produced, it becomes increasingly more difficult to find resources that are well-suited to producing that product. Therefore, the opportunity cost of producing more units grows and the PPF becomes steeper and steeper. The PPF is a straight line when the resources used to produce the two products are perfectly interchangeable, and thus the opportunity cost of producing more units is constant. 3. Using your own words, describe the law of increasing opportunity costs. Be sure to explain why this phenomenon occurs and how it helps to contribute to the shape of the production possibilities frontier. ANS: People (and other resources) have varying abilities when it comes to producing a given product which results in a non-constant opportunity cost. Those resources that are better suited at making the product will have a lower opportunity cost than those who are less-suited. As more of a product is produced, it becomes increasingly more difficult to find resources that are well-suited to producing that product. Therefore, the opportunity cost of producing more units grows as additional units are produced. and the PPF becomes steeper and steeper. The result is that the PPF is typically bowed-outward due to the law of increasing opportunity costs. 4. Explain what productive efficiency means. Describe how productive efficiency is represented by a PPF. ANS: An economy is producing efficiently if it is producing the maximum amount of output with a set amount of resources and technology. Efficiency is represented by all of the points that lie along the PPF. 5. Explain how a technological advancement in one sector of the economy can lead to a change in the number of people who work in another sector of the economy. Give an example to help support your answer. ANS: A technological advancement in one sector of the economy can lead to fewer people being needed to produce the goods in that sector. This will release people from that sector and allow them to take jobs in other sectors of the economy. This is what happened in the farming industry during the 20th century. As more and more farming tasks that had once been performed by people were being performed by machinery and computers, the former farmers were then free to find jobs in fields such as manufacturing and service industries. 6. Assume that two products are being produced: benches and chairs. Create a table that illustrates constant opportunity costs in the production of these two goods. Draw a production possibilities frontier (PPF) based on the data in your table and explain the condition necessary for a PPF to exhibit constant opportunity costs. ANS: The following table illustrates constant opportunity costs: Benches 0 10 20 30 40 Chairs 160 120 80 40 0 The PPF associated with this table would be a downward-sloping straight line with one axis labeled “Benches” and the other axis labeled “Chairs”. The opportunity cost in this example is a constant rate of 4 chairs forfeited for every one bench produced. In order for a PPF to exhibit constant opportunity costs, the resources used to produce the products must be equally well-suited to the production of both products.