Macroeconomics, 11th Edition solutions manual and test bank by Roger A. Arnold

Macroeconomics, 11th Edition solutions manual and test bank by Roger A. Arnold 

Chapter 2—Production Possibilities Frontier Framework

MULTIPLE CHOICE

1. Points outside (or beyond) the PPF are

a.	attainable.
b.	unattainable.
c.	efficient.
d.	inefficient.

ANS: B PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

2. Which of the following statements is true?

a.	In a world of efficiently used scarce resources, more of one good necessarily means less of some other good.
b.	The law of increasing opportunity costs assumes that all people have the same ability to produce goods.
c.	Efficiency implies that it is impossible to get more of one good without getting less of another.
d.	Even if a country has unemployed resources, it can still be operating on its production possibilities frontier (PPF).
e.	a and c

ANS: E PTS: 1 DIF: Difficulty: Challenging

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

3. Through war, many of the factories in country 1 are destroyed and many of its people are killed. As a result, the country's

a.	production possibilities frontier (PPF) after the war has probably shifted to the right compared to its PPF prior to the war.
b.	PPF after the war has probably shifted to the left compared to its PPF prior to the war.
c.	PPF after the war is probably the same PPF as before the war.
d.	ability to produce goods and services has increased.
e.	b and d

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

4. The economy moves from point A, where it produces 100X and 200Y, to point B, where it produces 200X and 150Y. It follows that

a.	point A is a productive inefficient point.
b.	point A may be a productive inefficient point.
c.	point A may be a productive efficient point.
d.	point B is a productive efficient point.
e.	b and c

ANS: E PTS: 1 DIF: Difficulty: Challenging

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

5. Both country 1 and country 2 are located on their respective production possibilities frontiers (PPFs), but country 1 produces twice the output that country 2 produces. It follows that

a.	country 1's PPF lies further to the right than country 2's PPF.
b.	country 1 has a smaller population than country 2.
c.	country 1 has a bigger population than country 2.
d.	country 1 is efficient and country 2 is inefficient.
e.	none of the above

ANS: A PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

6. If there is always a three-for-one tradeoff between goods X and Y, then the PPF between X and Y is

a.	a downward-sloping curve that is bowed outward.
b.	a downward-sloping curve that is bowed inward.
c.	a downward-sloping straight line.
d.	an upward-sloping straight line.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

7. Points inside (or below) the PPF are

a.	unattainable.
b.	attainable and productive efficient.
c.	attainable but productive inefficient.
d.	attainable and neither productive efficient nor productive inefficient.

ANS: C PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

8. If increasingly more units of good Y must be given up as each successive unit of good X is produced, then the PPF for these two goods is

a.	a downward-sloping straight line.
b.	circular.
c.	an upward-sloping curve.
d.	a downward-sloping curve that is bowed outward.
e.	a downward-sloping curve that is bowed inward.

ANS: D PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

9. Consider the following combinations of guns and butter that can be produced: 0 guns, 20,000 units of butter; 5,000 guns, 15,000 units of butter; 10,000 guns, 10,000 units of butter; 15,000 guns, 5,000 units of butter; 20,000 guns, 0 units of butter. The PPF between guns and butter is

a.	a downward-sloping bowed-out curve.
b.	a downward-sloping straight line.
c.	an upward-sloping straight line.
d.	It is impossible to answer this question without knowing which good would be plotted on the vertical axis.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Analysis

10. Which of the following statements is true?

a.	The concept of opportunity costs cannot be illustrated within a PPF framework.
b.	If scarcity did not exist, neither would a PPF.
c.	All PPFs are downward-sloping straight lines.
d.	There are more attainable points than unattainable points in every PPF diagram.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

11. A PPF can

a.	shift outward but not inward.
b.	shift inward but not outward.
c.	shift inward or outward.
d.	shift neither inward nor outward.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

12. Consider two points on the PPF: point A, at which there are 10 apples and 20 pears, and point B, at which there are 7 apples and 21 pears. If the economy is currently at point A, the opportunity cost of moving to point B is

a.	1 pear.
b.	7 apples.
c.	3 apples.
d.	21 pears.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

13. Consider two points on the PPF: point A, at which there are 50 oranges and 100 apricots, and point B, at which there are 51 oranges and 98 apricots. If the economy is currently at point B, the opportunity cost of moving to point A is

a.	2 apricots.
b.	1 orange.
c.	98 apricots.
d.	3 oranges.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

14. The point where the PPF intersects the vertical axis is

a.	unattainable.
b.	attainable and productive efficient.
c.	attainable but productive inefficient.
d.	attainable and neither productive efficient nor productive inefficient.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

15. The point where the PPF intersects the horizontal axis is

a.	unattainable.
b.	attainable and productive efficient.
c.	attainable but productive inefficient.
d.	attainable and neither productive efficient nor productive inefficient.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

16. Consider two straight-line PPFs. They have the same vertical intercept, but curve I is flatter than curve II. The opportunity cost of producing the good on the horizontal axis

a.	is greater along curve I.
b.	is greater along curve II.
c.	is the same along both curves.
d.	cannot be compared for the two curves without more information.

ANS: B PTS: 1 DIF: Difficulty: Challenging

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

17. Consider two straight-line PPFs. They have the same vertical intercept, but curve I is flatter than curve II. The opportunity cost of producing the good on the vertical axis

a.	is greater along curve I.
b.	is greater along curve II.
c.	is the same along both curves.
d.	cannot be compared for the two curves without more information.

ANS: A PTS: 1 DIF: Difficulty: Challenging

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

18. Suppose the economy goes from a point on its production possibilities frontier (PPF) to a point below that PPF. Assuming that the PPF has not shifted, this could be due to

a.	a gain of resources.
b.	a loss of resources.
c.	technological improvement in the production of both goods.
d.	a new law that interferes with economic efficiency.

ANS: D PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Application NOT: New

19. Suppose the economy goes from a point on its production possibilities frontier (PPF) to a point below that PPF. Assuming that the PPF has not shifted, this could be due to

a.	a gain of resources.
b.	a loss of resources.
c.	technological improvement in the production of both goods.
d.	an increase in unemployment of some resources.

ANS: D PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

20. An increase in the quantity of resources

a.	shifts the PPF leftward.
b.	shifts the PPF rightward.
c.	moves the economy to a new point up along a given PPF.
d.	moves the economy to a new point down along a given PPF.

ANS: B PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

21. A decrease in the quantity of resources

a.	shifts the PPF leftward.
b.	shifts the PPF rightward.
c.	moves the economy up a given PPF.
d.	moves the economy down a given PPF.

ANS: A PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

22. The increased production of lamps comes at constant opportunity costs in terms of bookshelves. This means

a.	that it takes more resources to produce a lamp than a bookshelf.
b.	that it takes fewer resources to produce a lamp than a bookshelf.
c.	that for every lamp produced, a constant number of bookshelves is forfeited.
d.	that for every lamp produced, a different number of bookshelves is forfeited.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

23. Which of the following is an illustration of the law of increasing opportunity costs?

a.	As more cars are produced, the opportunity cost of each additional car is greater than for the preceding unit.
b.	As more cars are produced, the opportunity cost of each additional car is less than for the preceding unit.
c.	As more cars are produced, the opportunity cost of each additional car is the same as for the preceding unit.
d.	People pay lower prices for cars the higher the costs of producing cars.

ANS: A PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

24. 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 outward if increasing opportunity costs exist.
d.	curve that is bowed outward if constant opportunity costs exist.

ANS: C PTS: 1 DIF: Difficulty: Challenging

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

25. A PPF is more likely to be a downward-sloping curve that is bowed outward than a downward-sloping straight line because most resources are

a.	better suited for the production of some goods than others.
b.	used efficiently.
c.	relatively cheap at low levels of output.
d.	used to produce consumption goods.

ANS: A PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

26. Economic growth causes the PPF to

a.	shift leftward.
b.	shift rightward.
c.	remain constant.
d.	go from a straight line to a curve.

ANS: B PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth

KEY: Bloom's: Knowledge

27. Which of the following statements is false?

a.	If there are only two goods, guns and butter, it is possible to produce more of both goods through economic growth.
b.	If there are only two goods, guns and butter, it is possible to produce more of both goods if the economy is currently operating at a productive inefficient point.
c.	If there are only two goods, guns and butter, it is possible to produce more of both goods if the economy is currently operating at a productive efficient point.
d.	If there are only two goods, guns and butter, producing more of one means producing less of the other if the economy is currently operating at a productive efficient point.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

28. An economy is productive efficient if it produces

a.	more than enough food to feed everyone.
b.	more goods and services in each successive year.
c.	maximum output with given resources and technology.
d.	enough output so that no one lives in poverty.

ANS: C PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

29. Which of the following statements is true?

a.	Productive inefficiency implies that it is possible to produce more of one good and no less of another, but only if additional resources are made available.
b.	Productive efficiency implies that it is possible to produce more of one good and no less of another, even without additional resources.
c.	Productive inefficiency implies that it is impossible to produce more of one good and no less of another.
d.	Productive inefficiency implies that it is possible to produce more of one good and no less of another, even without additional resources.

ANS: D PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

30. Productive inefficiency implies that

a.	it is possible to obtain gains in one area without losses in another.
b.	it is impossible to obtain gains in one area without losses in another.
c.	there are too many resources.
d.	there are too few resources.
e.	none of the above

ANS: A PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

31. Productive efficiency implies that

a.	it is impossible to obtain gains in one area without losses in another.
b.	it is possible to obtain gains in one area without losses in another.
c.	there are too many resources.
d.	there are too few resources.
e.	none of the above

ANS: A PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

32. Suppose the economy goes from a point on its production possibilities frontier (PPF) to a point directly to the left of it. Assuming that the PPF has not shifted, this could be due to

a.	a gain of resources.
b.	a loss of resources.
c.	technological improvement in the production of both goods.
d.	a new law that interferes with productive efficiency.

ANS: D PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Application

Exhibit 2-1

33. Refer to Exhibit 2-1. The PPF illustrates

a.	constant opportunity costs between guns and butter.
b.	that guns are more important than butter.
c.	increasing opportunity costs between guns and butter.
d.	the opportunity cost of one unit of guns is four units of butter.
e.	none of the above

ANS: A PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

34. Refer to Exhibit 2-1. The movement from point A to point B is a movement from

a.	a productive efficient point to a productive inefficient point.
b.	a point with more guns and less butter to a point with more butter and even more guns.
c.	a productive efficient point to another productive efficient point.
d.	a productive inefficient point to a productive efficient point.

ANS: C PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

35. Refer to Exhibit 2-1. A movement from point B to point D

a.	could only happen through economic growth.
b.	is necessarily a movement from a productive efficient point to a productive inefficient point.
c.	is a movement from a productive efficient point to another productive efficient point.
d.	is necessarily a movement from a productive inefficient point to another productive inefficient point.

ANS: A PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

36. Refer to Exhibit 2-1. If the economy is at point C, it follows that

a.	more guns and more butter could be produced with available resources than are currently being produced.
b.	only more guns could be produced with available resources than are currently being produced.
c.	only more butter can be produced with available resources than are currently being produced.
d.	C is an unattainable point.

ANS: A PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

37. Refer to Exhibit 2-1. The opportunity cost of moving from point B to A is

a.	10,000 units of butter.
b.	20,000 units of butter.
c.	50,000 units of guns.
d.	the maximum amount of butter that can be produced with available resources.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application

38. Refer to Exhibit 2-1. Scarcity exists

a.	at point C but not at point A.
b.	neither at point C nor at point A.
c.	at both point C and at point A.
d.	at point A but not at point C.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

39. Refer to Exhibit 2-1. The opportunity cost of moving from point A to B is

a.	10,000 units of butter.
b.	20,000 units of butter.
c.	20,000 units of guns.
d.	10,000 units of guns.

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Application NOT: New

40. According to the text, farming today in the U.S. is __________ productive compared to a century ago, resulting in there being __________ farmers today than at the turn of the previous century.

a.	about as; fewer
b.	about as; more
c.	much more; fewer
d.	much more; more

ANS: C PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth

KEY: Bloom's: Knowledge

41. Technological __________ in American agriculture has __________ other types of employment.

a.	improvement; drawn labor away from
b.	improvement; released labor to go to
c.	stagnation; drawn labor away from
d.	stagnation; released labor to go to

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth

KEY: Bloom's: Knowledge

42. In the production possibilities framework, economic growth is depicted by the PPF

a.	shifting leftward (toward the origin).
b.	shifting rightward (away from the origin).
c.	becoming a straight line rather than a bowed outward curve.
d.	becoming bowed outward rather than a straight line.

ANS: B PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth

KEY: Bloom's: Comprehension

Exhibit 2-2

43. Refer to Exhibit 2-2. If PPF₂ is the relevant production possibilities frontier, then point __________ illustrates productive inefficiency.

a.	A
b.	B
c.	C
d.	J
e.	a, b, or c

ANS: E PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension NOT: New

44. Refer to Exhibit 2-2. If PPF₂ is the relevant production possibilities frontier, then point __________ is unattainable.

a.	A
b.	G
c.	D
d.	J

ANS: D PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

45. Refer to Exhibit 2-2. If PPF₂ is the relevant production possibilities frontier, then point __________ is productive efficient.

a.	B
b.	D
c.	I
d.	F
e.	both b and d

ANS: E PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

46. Refer to Exhibit 2-2. If PPF₂ is the relevant production possibilities frontier, a significant loss of resources will

a.	move this society from point D to point G on PPF.
b.	move this society to PPF.
c.	move this society to PPF.
d.	not affect this society.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

47. Refer to Exhibit 2-2. The production possibilities frontiers shown in this exhibit depict _______________ opportunity costs.

a.	constant
b.	increasing
c.	decreasing
d.	There is not enough information provided to answer this question.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

Exhibit 2-3

48. Refer to Exhibit 2-3. If PPF₁ is the relevant production possibilities frontier, society may move to PPF₂ as a result of

a.	an increase in resources.
b.	a decrease in resources.
c.	an increase in technology.
d.	both a and c
e.	both b and c

ANS: D PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth

KEY: Bloom's: Comprehension

49. Refer to Exhibit 2-3. If PPF₁ is the relevant production possibilities frontier, society can choose points that lie only

a.	below PPF1.
b.	below or on PPF1.
c.	on PPF2.
d.	none of the above

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

50. Refer to Exhibit 2-3. If PPF₁ is the relevant production possibilities frontier, PPF₂ may depict

a.	economic growth.
b.	an increase in resources.
c.	an increase in technology.
d.	both b and c
e.	all of the above

ANS: E PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth

KEY: Bloom's: Comprehension

51. A productive efficient society

a.	produces at a point on its PPF.
b.	can produce more of one good only by giving up some of another good.
c.	cannot produce unlimited amounts of a good.
d.	still has to make choices.
e.	all of the above

ANS: E PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

52. If resources are better suited toward the production of one good than toward the other good, then the PPF for those two goods is

a.	a straight line.
b.	bowed outward.
c.	upward sloping.
d.	any of the above

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

53. A society is productive inefficient when

a.	it produces at a point inside or below its PPF.
b.	it does not produce the maximum output with its given resources and technology.
c.	it can produce more of one good without giving up some of another good.
d.	both a and b
e.	all of the above

ANS: E PTS: 1 DIF: Difficulty: Challenging

NAT: BUSPROG: Analytic LOC: DISC: Efficiency and equity

KEY: Bloom's: Comprehension

54. With a constant opportunity cost between goods A and B, the PPF for goods A and B would

a.	be a straight line.
b.	be a bowed-outward line.
c.	be a bowed-inward line.
d.	not exist.

ANS: A PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

55. Within the production possibilities frontier (PPF) framework, choice is depicted by the

a.	PPF itself.
b.	PPF being bowed outward.
c.	need to select among the points making up the PPF.
d.	straight-line PPF.

ANS: C PTS: 1 DIF: Difficulty: Easy

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

56. If there is an increase in the amount of good B foregone as every additional unit of good A is produced, the PPF between goods A and B would

a.	be a straight line.
b.	be a bowed-outward curve.
c.	be a bowed-inward curve.
d.	not exist.

ANS: B PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Scarcity, tradeoffs, and opportunity cost

KEY: Bloom's: Comprehension

 

CHAPTER 2

Production Possibilities Frontier Framework

Chapter 2 introduces the basics of the PPF, comparative advantage, and trade. This is not exactly a “tools of economics” chapter; instead it explores basic premises that underlie the economic analysis presented throughout the text.

n KEY IDEAS

1. The PPF is a framework used to examine production.

2. The PPF can be used to demonstrate several economic concepts.

3. Individuals can make themselves better off by specializing in production according to their comparative advantages, and then trading for other goods.

n CHAPTER OUTLINE

I. THE PRODUCTION POSSIBILITIES FRONTIER

The production possibilities frontier is a framework in which to examine production; it represents the combination of two goods that can be produced in a certain period of time, under the conditions of a given state of technology and fully employed resources.

A. The Straight-Line PPF: Constant Opportunity Costs

A straight-line PPF indicates that the opportunity cost of producing additional units of output is fixed.

B. The Bowed-Outward (Concave-Downward) PPF: Increasing Opportunity Costs

A bowed-outward PPF indicates that the law of increasing opportunity costs holds, that is, for most goods, opportunity costs increase as more of the good is produced. The law of increasing opportunity costs holds because people have varying abilities, so that they aren’t equally adept at producing all goods.

C. Law of Increasing Opportunity Costs

For most goods, the opportunity costs increase as more of the good is produced.

D. Economic Concepts in a PPF Framework

The PPF can be used to illustrate seven economic concepts: choice, opportunity costs, productive inefficiency, and the four discussed in this section:

1. Scarcity

The PPF separates two regions: an attainable region, which consists of the points on the PPF and all points below it, and an unattainable region, which consists of all points above and beyond the PPF. Within the attainable region, individuals must choose which combination of goods they want to produce. There is an opportunity cost associated with each choice whenever there is a movement along a PPF.

2. Productive Efficiency

An economy is productive efficient if it is producing the maximum output with the given resources and technology (that is, if it is producing at a point on the frontier), and is productive inefficient if it is not.

3. Unemployed Resources

One reason that an economy may exhibit productive inefficiency is that it is not using all its resources.

4. Economic Growth

Economic growth refers to the increased productive capabilities of an economy, and is illustrated by a shift outward in the PPF. An increase in the quantity of resources or an advance in technology will lead to economic growth.

II. SPECIALIZATION AND TRADE CAN MOVE US BEYOND OUR PPF

A country that specializes in the production of certain goods, and then trades those goods to countries for other goods, can make itself better off.

A. A Simple Two-Person PPF Model

This section uses a two-person model to show the advantages of specialization and trade. An economist would advise each person in this model to produce the good that he or she can produce at a lower cost. In economics, a person who can produce a good at a lower cost than another person is said to have a comparative advantage in the production of the good. Individuals and countries can make themselves better off by specializing in the production of goods that they have a comparative advantage in, and then trading for other goods.

B. On or Beyond the PPF?

What holds for individuals holds for countries too. For example, if both Americans and Brazilians specialize in producing those goods for which they have a comparative advantage and then trade some of those goods for the others’ goods, both Americans and Brazilians can consume more of both goods than if they don’t specialize and don’t trade.

C. Why Do People Specialize and Trade?

People specialize and trade because of comparative advantage: some people can produce certain goods and services at a lower opportunity cost than others. There would be less specialization and trade in a world where there are no comparative advantages than in a world where there are comparative advantages.

n Teaching Advice

1. One of the most important things that students can learn from studying the production possibilities frontier is that choices have consequences. Emphasize that when we choose to produce at one point rather than at some other point on the PPF, we obtain more of one good than we would have had at the other point, but we don’t get to have as much of the other good as we would have had at the other point. Use the Production Possibilities Frontier Exercise (presented below as a sheet that can easily be reproduced for students) to reinforce this point and the point that the law of increasing opportunity cost holds.

2. Go to www.bls.gov and, on the right side of the screen, click on the historical data link for unemployment rates. Use this data to show how recent changes in unemployment rates have affected our position relative to the PPF (ceteris paribus, increases in the unemployment rate do not affect the position of our nation’s PPF, but, rather how close to the PPF we can operate).

3. http://www.economy.com/dismal/provides daily examples of economic life in government-controlled versus less-controlled environments, and examples that can be used to discuss tradeoffs, efficiency, and the production possibilities frontier. The same is true for http://cnn.com and http://cnnfn.com.

n Assignments for mastering KEY IDEAS

Assignment 2.1

Key Idea: The PPF is a framework used to examine production.

1. Explain what a production possibilities frontier represents.

2. Analyze what it means for the PPF to be bowed out from the origin (curved), and what it means for the PPF to be a straight line.

3. State the law of increasing opportunity costs and explain why it holds.

Assignment 2.2

Key Idea: The PPF can be used to demonstrate several economic concepts.

1. Explain how the PPF is used to demonstrate scarcity.

2. Use the PPF to demonstrate choice and opportunity cost.

3. Define productive efficiency and use the PPF to demonstrate it.

4. Use the PPF to show unemployment.

5. Use PPF curves to show economic growth and list the sources of economic growth.

Assignment 2.3

Key Idea: Individuals can make themselves better off by specializing in production according to their comparative advantages, and then trading for other goods.

1. Use the concept of comparative advantage to describe who should produce a particular good.

2. Explain why people should specialize and trade.

3. Explain how acting in one’s self interest benefits society.

n ANSWERS TO Assignments for mastering KEY IDEAS

Assignment 2.1 Answers

1. A production possibilities frontier represents the combination of two goods that can be produced in a certain period of time, under the conditions of a given state of technology and fully employed resources.

2. A straight line PPF indicates that the opportunity cost of producing additional units of output is fixed, while a bowed-outward PPF indicates that the opportunity cost rises with production.

3. The law of increasing opportunity costs says that as more of a good is produced, the opportunity costs of producing that good increase. It holds because people have varying abilities, and aren’t equally adept at producing all goods.

Assignment 2.2 Answers

1. The PPF separates an attainable region (all points on or under the PPF) from an unattainable region (all points above the PPF). Scarcity makes the points above the PPF unattainable.

2. Only one point on a PPF can be chosen. When choosing one point over another point, the value of what could have been chosen but wasn’t chosen is the opportunity cost of our choice.

3. An economy is productive efficient if it is producing the maximum output with given resources and technology. All of the points on the frontier are points of productive efficiency.

4. If there is unemployment, then the economy will be at a point below the PPF.

5. Economic growth is illustrated by a shift outward in the PPF, and would be caused by more resources or an advance in technology.

Assignment 2.3 Answers

1. A person who can produce a good at a lower cost than another person has a comparative advantage in the production of that good, and is the person who should produce it.

2. Specialization and trade increase production and make people better off. When someone specializes and trades his surplus, he earns a profit. The person who buys the surplus lowers her cost of living.

3. When people act in their own self-interest and produce goods with a lower opportunity cost, the overall output of society increases.

n ANSWERS TO video QUESTIONS and problems

1. Explain how to derive a production possibilities frontier (PPF).

Assume that a country can produce two goods, X and Y. The country can use the resources available at its disposal to produce any combination of X and Y. For example, it may choose to produce:

a. 10 units of X and 0 units of Y; or

b. 5 units of X and 5 units of Y; or

c. 0 units of X and 10 units of Y.

In the following figure, the good Y is shown on the vertical axis and good X is shown on the horizontal axis. The three combinations of output have been plotted on the graph to form the PPF.

2. What does a PPF that is bowed outward imply about the opportunity cost of production?

Assume a PPF showing the different combinations of X and Y that can be produced in an economy. If the PPF is bowed outward, it means the opportunity cost of producing good X is increasing. That is, as we produce more X, more and more quantities of good Y have to be given up for producing every additional unit of good X.

3. Based on the data below, identify which good each person has a comparative advantage in producing.

a. Person A can produce the following three combinations of goods: (1) 10X and 0Y, (2) 5X and 5Y, (3) 0X and 10Y.

b. Person B can produce the following three combinations of goods: (1) 10X and 0Y, (2) 5X and 15Y, (3) 0X and 30Y

Person A has to give up 5 units of X to produce 5 units of Y. Thus, his opportunity cost of producing 5X is 5Y; that is, 1X = 1Y or 1Y = 1X.

Person B has to give up 5 units of X to produce 15 units of Y. Thus, his opportunity cost of producing 5X is 15Y; that is, 1X = 3Y or 1Y = 1/3 X.

To produce 1 unit of X, person A has to give up only 1 unit of Y, while person B has to give up 3 units of Y. Thus, person A has a comparative advantage in producing good X.

To produce 1 unit of Y, person A has to give up 1 unit of X, while person B has to give up only 1/3 X. Thus, person B has a comparative advantage in producing good Y.

4. Illustrate scarcity, opportunity cost, and economic growth within a PPF framework of analysis.

a. Scarcity is represented by the boundary of the PPF. That is, given a country’s resources, there is a limit to the amount of output that can be produced. While a country can produce any combination of goods on, or inside the PPF, any output beyond the PPF is not possible due to the scarcity of resources.

b. Opportunity cost refers to the sacrifice that is to be made in terms of one good in order to increase the production of another good by one more unit. In terms of PPF, a downward movement along the curve shows the quantity of the good, on the vertical axis, that has to be given up for every additional unit produced of the good on the horizontal axis.

c. Economic growth is represented by an outward shift in the PPF. The economy moves to a point on the new PPF as there are now more resources that can be used to produce goods.

5. A country is currently experiencing a high unemployment rate. Diagrammatically represent the country within a PPF framework of analysis.

In the above graph, points A, B, and C represent full employment of resources since they lie on the PPF. Point D which lies beyond the PPF indicates that level of output which cannot be attained by the economy due to finite resources. Point E that lies below the PPF indicates that the resources of the economy are not fully employed. Thus, a high unemployment rate is shown by point E within a PPF framework of analysis.

n ANSWERS TO CHAPTER QUESTIONS and problems

1. Describe how each of the following would affect the U.S. production possibilities frontier: (a) an increase in the number of illegal immigrants entering the country, (b) a war that takes place on U.S. soil, (c) the discovery of a new oil field, (d) a decrease in the unemployment rate, and (e) a law that requires individuals to enter lines of work for which they are not suited.

(a) Ceteris paribus, an increase in the number of illegal immigrants entering the country will increase the available productive human resources of the economy; therefore, the PPF should shift outward, as shown in Exhibit 6(a).

(b) A war would remove individuals, capital, and potentially other resources from the productive process; therefore, ceteris paribus, the PPF would shift inward.

(c) The discovery of a new oil field would represent an addition to the country’s resources; therefore, the PPF would shift outward.

(d) A decrease in the unemployment rate would be represented by movement from a point below the PPF to another point closer to or on the frontier, such as from point F to point D, in Exhibit 5.

(e) Such a law would decrease the productive efficiency of labor, thereby moving the economy from a point on or inside the frontier to another point further inside the frontier.

2. Explain how the following can be represented in a PPF framework: (a) the finiteness of resources implicit in the scarcity condition; (b) choice; (c) opportunity cost; (d) productive efficiency; and (e) unemployed resources.

Scarcity is illustrated by the existence of the frontier: if there were unlimited resource availability, there would be no limit on output. Choice is illustrated by the variety of possible combinations along the frontier: there is not a single optimum or efficient combination of the two goods. Opportunity cost is represented by the slope of the frontier or can be viewed as how much we give up of one good to get one more unit of another good. Productive efficiency is represented by points on the frontier. Unemployed resources are represented by points below the frontier.

3. What condition must hold for the production possibilities frontier to be bowed outward (concave downward)? To be a straight line?

In order for a nation’s PPF to be bowed outward, resources must be somewhat specialized, so that the law of increasing opportunity costs holds. With specialized resources, additional units of a good can only be produced at increasing opportunity costs. In order for a nation’s PPF to be a straight line, there must be complete interchangeability of resources, with no specialization, so that the law of increasing opportunity costs does not apply.

4. Give an example to illustrate each of the following: (a) constant opportunity costs and (b) increasing opportunity costs.

Answers will vary. Constant opportunity costs occur when increasing output of a good does not cause society to give up more and more resources in order to produce that good. Although at some point increasing opportunity costs will occur, over some level of output constant opportunity costs could prevail. For example, if a college has a $20 million budget and each class costs $25,000 to offer, then the school can offer 800 classes during the year. If the college received a $500,000 grant, it could offer another 20 classes if its costs did not increase, perhaps because there were unemployed professors ready and willing to work at the going wage rate. Increasing opportunity costs occur when society has to give up more and more of one resource in order to obtain another resource. If the college received a second $500,000 grant, it might not be able to offer another 20 classes, if there were no unemployed professors ready and willing to work at the going wage rate. In order to hire more teachers, the college would have to hire individuals who had a higher opportunity cost.

5. Why are most production possibilities frontiers for goods bowed outward (concave downward)?

Most production possibilities frontiers are concave downward because the law of increasing opportunity costs holds. This law says that as society devotes more resources to the production of a given good, the opportunity cost of producing that good will increase. The reason for this is that the most efficient resources will be used to initially produce that good. Only as those resources are used up will society employ less productive resources. Farmers will plant wheat in Kansas before they plant wheat in Alaska or Nevada.

6. Within the PPF framework, explain each of the following: (a) a disagreement between a person who favors more domestic welfare spending and one who favors more national defense spending; (b) an increase in the population; and (c) a technological change that makes resources less specialized.

(a) The first question deals with choices among possible output combinations along a frontier representing total government spending. For illustrative purposes, substitute “domestic welfare spending” for “Good X” and “national defense spending” for “Houses” in Exhibit 3. The person favoring more welfare spending would prefer point C, while the person favoring more defense spending would prefer point D.

(b) An increase in population, ceteris paribus, will shift the PPF outward, as in Exhibit 6(a).

(c) A technological change that makes resources less specialized will lessen the opportunity cost of switching production from one good to another. The production possibility frontier will become less bowed outward (straighter relative to the origin).

7. Explain how to derive a production possibilities frontier. For instance, how is the extreme point on the vertical axis identified? How is the extreme point on the horizontal axis identified?

The extreme point on the vertical axis is identified by figuring out how much of the good on that axis can be produced using all of the economy’s available resources. The extreme point on the horizontal axis is identified by figuring out how much of the good on the horizontal axis can be produced using all of the economy’s available resources. Once the extreme point on the vertical axis (for example) has been identified, other points can be identified by asking how much of that good must be given up in order increase production of the good on the horizontal axis by some discrete amount. The production possibilities frontier can be derived by identifying all the points that show the combinations of both goods that can be produced in the economy.

8 If the slope of the production possibilities frontier is the same between any two points, what does this imply about costs? Explain your answer.

A PPF slope that is the same between any two points implies that the opportunity cost of producing the two goods represented on the axes is constant.

9 Suppose a nation’s PPF shifts inward as its population grows. What happens, on average, to the material standard of living of the people? Explain your answer.

The material standard of living would tend to decrease. The economy, as a whole, would have fewer goods and services to go around and would be distributing them to more people. Consequently, each person would get less and less.

10. Can a technological advancement in sector X of the economy affect the number of people who work in sector Y of the economy? Explain your answer.

Yes. A technological advancement in sector X makes it possible to produce X with fewer people, freeing those people to produce other things (Y, for example).

11. Use the PPF framework to explain something in your everyday life that was not mentioned in the chapter.

Answers will vary but should illustrate some of the following: choice, opportunity costs, productive inefficiency, scarcity, productive efficiency, unemployed resources, and growth.

12. What exactly allows individuals to consume more if they specialize and trade than if they don’t?

The fact that each person specializes in producing what he or she can produce at lower cost is what “releases” resources to produce more goods, which then leads to greater consumption.

n ANSWERS TO PROBLEMS IN THE WORKING WITH NUMBERS AND GRAPHS SECTION

1. Illustrate constant opportunity costs in a table similar to the one in Exhibit 1(a). Next, draw a PPF based on the data in the table.

Answers will vary, but the PPF will be a straight line similar to the one in Exhibit 1(b).

2. Illustrate increasing opportunity costs (for one good) in a table similar to the one in Exhibit 2(a). Next, draw a PPF based on the data in the table.

Answers will vary, but the PPF will be bowed outward similar to the one in Exhibit 2(b).

3. Draw a PPF that represents the production possibilities for goods X and Y if there are constant opportunity costs. Next, represent an advance in technology that makes it possible to produce more of X, but not more of Y. Finally, represent an advance in technology that makes it possible to produce more of Y, but not more of X.

4. In the following figure, which graph depicts a technological breakthrough in the production of good X only?

Graph (3). The technological breakthrough allows more of good X to be produced, so the extreme point of the PPF on the horizontal axis shifts outward.

5. In the preceding figure, which graph depicts a change in the PPF that is likely as a consequence of war?

Graph (2). A likely consequence of war is decreased production of all goods leading to an inward shift of the PPF.

6. If PPF₂ in the following graph is the relevant production possibilities frontier, then which points are unattainable? Explain your answer.

J, I and H are unattainable. They are farther from the origin than PPF₂, which represents maximum possible output.

7. If PPF₁ in the preceding figure is the relevant production possibilities frontier, then which point(s) represent efficiency? Explain your answer.

Points A, B, and C represent efficiency because they are located on the frontier itself. By definition, a point on the frontier requires us to use all our existing resources and technology to their most efficient level.

8. Tina can produce any of the following combinations of goods X and Y: (a) 100X and 0Y, (b) 50X and 25Y, and (c) 0X and 50Y. David can produce any of the following combinations of goods X and Y: (a) 50X and 0Y, (b) 25X and 40Y, and (c) 0X and 80Y. Who has a comparative advantage in the production of good X? of good Y? Explain your answer.

Tina gives up 50X to produce 25Y (100 – 50 and 0 – 25). David gives up 25X to produce 40Y (50 – 25 and 0 – 40). Tina’s opportunity cost is 2X = 1Y (1X = 1/2Y) and David’s is 5/8X = 1Y (1X = 8/5Y). David can give up 50X and get 80Y, Tina gets only 25Y for 50X. So David has the lower opportunity cost for good Y and Tina for good X.

9. Using the data in Problem 8, prove that both Tina and David can be made better off through specialization and trade.

Start with Tina producing 50X and 25Y and David producing 25X and 40Y. Together, they produce 75X and 65Y. Now have Tina produce 100X and 0Y and David produce 0X and 80Y. Together they now produce 100X and 80Y. Tina could now consume (for example) 60X and 35Y and David could consume 40X and 45Y, making both better off.

n production possibilities frontier exercise

Pinnacle Paper Products Inc. can produce books or rolls of paper towels. Here is its PPF for the resources and technology it has available:

1. What is gained by choosing to produce at point B, instead of at point A?

2. What is the opportunity cost of choosing to produce at point B, instead of at point A?

3. What is gained by choosing to produce at point C, instead of at point B?

4. What is the opportunity cost of choosing to produce at point C, instead of at point B?

5. Continue moving point by point down the PPF. What is the pattern of gains as one chooses to move down this PPF from point A to B to C to D and so forth?

6. What is the pattern of opportunity costs as one chooses to move down this PPF from point A to B to C to D and so forth?

7. Does the law of increasing opportunity costs hold for book production at Pinnacle Paper Products? How do you know?

8. Explain how to determine whether the law of increasing opportunity cost holds for paper towel production at Pinnacle Paper Products.

n production possibilities frontier exercise answers

1. 10 books are gained by producing at point B, instead of at point A.

2. 10 rolls of paper towels is the opportunity cost of producing at point B, instead of at point A.

3. 10 books are gained by producing at point C, instead of at point B.

4. 20 rolls of paper towels is the opportunity cost of producing at point C, instead of at point B.

5. The gains are constant. 10 books are gained with each move.

6. Opportunity cost increases with each move. Increasingly larger numbers of rolls of paper towels are given up (10, then 20, 50, 55, 160, and finally, 220).

7. The law of increasing opportunity costs holds for book production at Pinnacle Paper Products, because each additional 10 books are more expensive than the previous 10 books in terms of the rolls of paper towels that must be given up in order to produce them.

8. Answers will vary, but should discuss finding the opportunity cost of obtaining constant gains in paper towels (for instance, from 0 to 155 rolls, to 310 rolls, to 465 rolls, to 620 rolls). Students can graphically show that the opportunity cost of obtaining these gains will rise. More and more books have to be given up to maintain this constant rate of gains. Therefore, the law of increasing opportunity costs does hold for paper towel production at Pinnacle Paper Products.

Macroeconomics, 11/E solutions manual and test bank Parkin

Macroeconomics, 11/E solutions manual and test bank Parkin

Macroeconomics, 11e (Parkin)

Chapter 2 The Economic Problem

1 Production Possibilities and Opportunity Cost

1) The production possibilities frontier is the boundary between

A) those combinations of goods and services that can be produced and those that can be consumed.

B) those resources that are limited and those that are unlimited.

C) those combinations of goods and services that can be produced and those that cannot.

D) those wants that are limited and those that are unlimited.

Answer: C

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

2) The production possibilities frontier is

A) upward sloping and reflects unlimited choices.

B) upward sloping and reflects tradeoffs in choices.

C) downward sloping and reflects unlimited choices.

D) downward sloping and reflects tradeoffs in choices.

Answer: D

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

3) The production possibilities frontier

A) depicts the boundary between those combinations of goods and services that can be produced and those that cannot given resources and the current state of technology.

B) shows how many goods and services are consumed by each person in a country.

C) is a model that assumes there is no scarcity and no opportunity cost.

D) is a graph with price on the vertical axis and income on the horizontal axis.

Answer: A

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

4) The production possibilities frontier itself illustrates

A) all goods that can be produced by an economy

B) the combination of goods and services that can be produced efficiently

C) all goods and services that are desired but cannot be produced due to scarce resources.

D) all possible production of capital goods

Answer: B

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 1

AACSB: Reflective Thinking

5) The production possibilities frontier is the boundary between those combination of goods and services that can be

A) produced and those that can be consumed.

B) consumed domestically and those that can be consumed by foreigners.

C) produced and those that cannot be produced.

D) consumed and those that cannot be produced.

Answer: C

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

6) The production possibilities frontier itself shows

A) the maximum amount of resources available at any given time.

B) combinations of goods and services that do not fully use available resources.

C) the maximum rate of growth of output possible for an economy.

D) the maximum levels of production that can be attained.

Answer: D

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

7) The production possibilities frontier represents

A) the maximum amount of labor and capital available to society.

B) combinations of goods and services among which consumers are indifferent.

C) the maximum levels of production that can be attained.

D) the maximum rate of growth of capital and labor in a country.

Answer: C

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

8) Which of the following is NOT true concerning a society's production possibilities frontier (PPF)?

A) It reveals the maximum amount of any two goods that can be produced from a given quantity of resources.

B) Tradeoffs occur when moving along a PPF.

C) Production efficiency occurs when production is on the frontier itself.

D) Consumers will receive equal benefits from the two goods illustrated in the PPF.

Answer: D

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

9) The production possibilities frontier separates ________.

A) the goods and services that people want from those that they do not want

B) the types of goods that can be attained from those that can't be attained

C) the quantities of goods and services that can be produced from those that cannot be produced

D) the combinations of goods that people value and those that they don't

Answer: C

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

10) When producing at a production efficient point, ________.

A) our choice of the goods can be either on or within the production possibilities frontier

B) we can satisfy our all wants

C) the opportunity cost of another good is zero

D) we face a tradeoff and incur an opportunity cost

Answer: D

Topic: Production Efficiency

Skill: Conceptual

Status: Modified 10th edition

AACSB: Reflective Thinking

11) Harry produces 2 balloon rides and 4 boat rides an hour. Harry could produce more balloon rides but to do so he must produce fewer boat rides. Harry is ________ his production possibilities frontier.

A) producing inside

B) producing on

C) producing outside

D) producing either inside or on

Answer: B

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Modified 10th edition

AACSB: Reflective Thinking

12) Production efficiency occurs when production ________.

A) is at a point beyond the production possibilities frontier

B) is on the production possibilities frontier or inside it

C) is at any attainable point

D) is on the production possibilities frontier

Answer: D

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

13) A point outside a production possibilities frontier indicates

A) that resources are not being used efficiently.

B) an output combination that society cannot attain given its current level of resources and technology.

C) that resources are being used very efficiently.

D) that both goods are characterized by increasing costs.

Answer: B

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

14) Which of the following is NOT illustrated by a production possibilities frontier?

A) scarcity

B) opportunity cost

C) necessity for choice

D) who gets the goods

Answer: D

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

15) A production possibilities frontier figure does NOT illustrate

A) the limits on production imposed by our limited resources and technology.

B) the exchange of one good or service for another.

C) opportunity cost.

D) attainable and unattainable points.

Answer: B

Topic: Production Possibilities Frontier

Skill: Analytical

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

16) Any production point outside the production possibilities frontier is

A) unattainable.

B) associated with unused resources.

C) attainable only if prices fall.

D) attainable only if prices rise.

Answer: A

Topic: Production Possibilities Frontier

Skill: Analytical

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

17) Which of the following statements regarding the production possibilities frontier is true?

A) Points outside the frontier are attainable.

B) Points inside the frontier are attainable.

C) Points on the frontier are less efficient than points inside the frontier.

D) None of the above because all of the above statements are false.

Answer: B

Topic: Production Possibilities Frontier

Skill: Analytical

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

18) 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.

Answer: D

Topic: Production Possibilities Frontier

Skill: Analytical

Status: Previous edition, Chapter 2

AACSB: Analytical Skills

19) On the vertical axis, the production possibilities frontier shows ________; on the horizontal axis, the production possibilities frontier shows ________.

A) the quantity of a good; the number of workers employed to produce the good

B) the quantity of a good; the price of the good

C) the quantity of a good; a weighted average of resources used to produce the good

D) the quantity of one good; the quantity of another good

Answer: D

Topic: Production Possibilities Frontier

Skill: Recognition

Status: Previous edition, Chapter 2

AACSB: Analytical Skills

20) Scarcity is represented on a production possibilities frontier figure by

A) the amount of the good on the horizontal axis forgone.

B) the fact that there are only two goods in the diagram.

C) technological progress.

D) the fact there are attainable and unattainable points.

Answer: D

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

21) The figure above shows Roger's production possibilities frontier. Point a is an ________ point and at that point production is ________.

A) attainable; efficient

B) attainable; inefficient

C) unattainable; inefficient

D) unattainable; efficient

Answer: B

Topic: Production Possibilities Frontier

Skill: Conceptual

Status: Modified 10th edition

AACSB: Analytical Skills

22) The above figure illustrates that if this country wishes to move from its current production point (labeled "Current") and have 10 more tons of food, it can do this by producing

A) 10 more tons of clothing.

B) 10 fewer tons of clothing.

C) 5 more tons of clothing.

D) 5 fewer tons of clothing.

Answer: D

Topic: Production Possibilities

Skill: Analytical

Status: Previous edition, Chapter 2

AACSB: Analytical Skills

23) Suppose the country of Popcorn produces only jets and corn. If Popcorn cannot produce any more jets without giving up corn, we say that Popcorn has achieved

A) the highest marginal benefit.

B) production efficiency.

C) the lowest marginal cost.

D) the highest opportunity cost.

Answer: B

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

24) A society that is producing on its production possibilities frontier is

A) not utilizing all of its resources.

B) not being technologically efficient.

C) producing too much output.

D) fully utilizing all of its productive resources.

Answer: D

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

25) If a country must decrease current consumption to increase the amount of capital goods it produces today, then it must

A) be using resources inefficiently today, but will be more efficient in the future.

B) be producing along the production possibilities frontier today and its production possibilities frontier will shift outward if it produces more capital goods.

C) must be producing outside the production possibilities frontier and will continue to do so in the future.

D) must not have private ownership of property and will have to follow planning authorities' decisions today and in the future.

Answer: B

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

26) A country that must decrease production of one good in order to increase the production of another

A) must be using resources inefficiently.

B) must be producing on its production possibilities frontier.

C) must be producing beyond its production possibilities frontier.

D) must have private ownership of property.

Answer: B

Topic: Production Efficiency

Skill: Conceptual

Status: Modified 10th edition

AACSB: Reflective Thinking

27) If an economy is operating at a point inside the production possibilities frontier, then

A) society's resources are being inefficiently utilized.

B) the PPF curve will shift inward.

C) society's resources are being used to produce too many consumer goods.

D) economic policy must retard further growth of the economy.

Answer: A

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

28) Any point on a production possibilities frontier (PPF) itself is

A) production efficient.

B) unattainable.

C) inefficient.

D) equitable.

Answer: A

Topic: Production Efficiency

Skill: Conceptual

Status: Modified 10th edition

AACSB: Reflective Thinking

29) If production point is inside the production possibilities frontier

A) it is not possible to produce more of both goods

B) production is inefficient.

C) in order to produce more of one good, less of the other must be produced.

D) production is in the "unattainable" region.

Answer: B

Topic: Production Efficiency

Skill: Conceptual

Status: Modified 10th edition

AACSB: Reflective Thinking

30) If a society is operating at a point inside its production possibilities frontier, then this society's

A) resources are being inefficiently utilized.

B) production possibilities frontier will shift rightward.

C) resources are being used in the most efficient manner.

D) economy will grow too fast.

Answer: A

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

31) A president of the United States promises to produce more defense goods without any decreases in the production of other goods. This promise can be valid

A) if the United States is producing at a point on its production possibilities frontier.

B) if the United States is producing at a point inside its production possibilities frontier.

C) if the United States is producing at a point beyond its production possibilities frontier.

D) only if the production possibilities frontier shifts rightward.

Answer: B

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

32) Using the production possibilities frontier model, unemployment is described as producing at a point

A) on the exact middle of the PPF curve.

B) on either end of the PPF curve.

C) inside the PPF curve.

D) outside the PPF curve.

Answer: C

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

33) A reduction in the amount of unemployment

A) shifts the production possibilities frontier outward.

B) moves the economy's point of production closer to the production possibilities frontier.

C) moves the economy's point of production along the production possibilities frontier.

D) moves the economy's point of production further away from the production possibilities frontier.

Answer: B

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

34) A point inside a production possibilities frontier

A) could indicate that some resources are unemployed.

B) is unattainable.

C) is more efficient than points on the production possibilities frontier.

D) implies that too much capital and not enough labor are being used.

Answer: A

Topic: Production Efficiency

Skill: Conceptual

Status: Previous edition, Chapter 2

AACSB: Reflective Thinking

Answers to the Review Quiz

Page 28

1. Explain how we “read” the three graphs in Figs. A1.1 and A1.2.

The points in the graphs relate the quantity of the variable measured on the one axis to the quantity of the variable measured on the other axis. The quantity of the variable measured on the horizontal axis (the x-axis) is measured by the horizontal distance from the origin to the point. Similarly, the quantity of the variable measured on the vertical axis (the y-axis) is measured by the vertical distance from the origin to the point. The point relates these two quantities. For instance, in Figure A1.2a, point A shows that at a price of $1.37 cents per song, 3.8 million songs are downloaded.

2. Explain what scatter diagrams show and why we use them.

Scatter diagrams plot the value of one economic variable against the value of another variable for a number of different values of each variable. We use scatter diagrams because they quickly reveal if a relationship exists between the two variables. Moreover, if a relationship exists, scatter diagrams show whether increases in one variable are associated with increases or decreases in the other variable.

3. Explain how we “read” the three scatter diagrams in Figs. A1.3 and A1.4.

The scatter diagram in Figure A1.3 shows the relationship between box office ticket sales and DVDs sold for 9 popular movies. The figure shows that higher box office sales are associated with a higher number of DVDs sold. But the figure shows that the relationship is weak.

The scatter diagram in Figure A1.4a shows the relationship between income, in thousands of dollars per year, and expenditure, also in thousands of dollars per year, for the years 2001 to 2011. The scatter diagram shows that higher income leads to higher expenditure. The figure also shows that the relationship is relatively strong.

The scatter diagram in Figure A1.4b shows the relationship between the inflation rate and the unemployment rate for the years 2001 to 2011. The figure shows that for most of the years, there was a weak relationship between these variables, with perhaps higher inflation being associated with lower unemployment.

4. Draw a graph to show the relationship between two variables that move in the same direction.

A graph that shows the relationship between two variables that move in the same direction is shown by a line that slopes upward. Figure A1.1 illustrates such a relationship.

5. Draw a graph to show the relationship between two variables that move in opposite directions.

A graph that shows the relationship between two variables that move in the opposite directions is shown by a line that slopes downward. Figure A1.2 illustrates such a relationship.

6. Draw a graph to show the relationship between two variables that have a maximum and a minimum.

A graph that shows the relationship between two variables that have a maximum is shown by a line that starts out sloping upward, reaches a maximum, and then slopes downward. Figure A1.3 illustrates such a relationship with curve B.

A graph that shows the relationship between two variables that have a minimum is shown by a line that starts out sloping downward, reaches a minimum, and then slopes upward. Figure A1.3 illustrates such a relationship with curve A.

7. Which of the relationships in Questions 4 and 5 is a positive relationship and which is a negative relationship?

The relationship in Question 4 between the two variables that move in the same direction is a positive relationship. The relationship in Question 5 between the two variables that move in the opposite directions is a negative relationship.

8. What are the two ways of calculating the slope of a curved line?

To calculate the slope of a curved line we can calculate the slope at a point or across an arc. The slope of a curved line at a point on the line is defined as the slope of the straight line tangent to the curved line at that point. The slope of a curved line across an arc—between two points on the curved line—equals the slope of the straight line between the two points.

9. How do we graph a relationship among more than two variables?

To graph a relationship among more than two variables, hold constant the values of all the variables except two. Then plot the value of one of the variables against the other variable.

10. Explain what change will bring a movement along a curve.

A movement along a curve occurs when the value of a variable on one of the axes changes while all of the other relevant variables not graphed on the axes do not change. The movement along the curve shows the effect of the variable that changes, ceteris paribus (holding all of the other non-graphed variables constant).

11. Explain what change will bring a shift of a curve.

A curve shifts when there is a change in the value of a relevant variable that is not graphed on the axes. In this case the entire curve shifts.

Answers to the Study Plan Problems and Applications

	A	B	C	D	E
1	2001	1.6	3.4	1.1	4.7
2	2002	2.4	1.6	1.8	5.8
3	2003	1.9	1.0	2.5	6.0
4	2004	3.3	1.4	3.5	5.5
5	2005	3.4	3.2	3.1	5.1
6	2006	2.5	4.7	2.7	4.6
7	2007	4.1	4.4	1.9	4.6
8	2008	0.1	1.5	−0.3	5.8
9	2009	2.7	0.2	−3.5	9.3
10	2010	1.5	0.1	3.0	9.6
11	2011	3.0	0.1	1.7	9.0

Use the spreadsheet to work Problems 1 to 3. The spreadsheet provides data on the U.S. economy: Column A is the year, column B is the inflation rate, column C is the interest rate, column D is the growth rate, and column E is the unemployment rate.

1. Draw a scatter diagram of the inflation rate and the interest rate. Describe the relationship.

To make a scatter diagram of the inflation rate and the interest rate, plot the inflation rate on the x-axis and the interest rate on the y-axis. The graph will be a set of dots and is shown in Figure A1.4. The pattern made by the dots tells us that as the inflation rate increases, the interest rate usually increases so there is a (weak) positive relationship.

2. Draw a scatter diagram of the growth rate and the unemployment rate. Describe the relationship.

To make a scatter diagram of the growth rate and the unemployment rate, plot the growth rate on the x-axis and the unemployment rate on the y-axis. The graph will be a set of dots and is shown in Figure A1.5. The pattern made by the dots tells us that when the growth rate increases, the unemployment rate usually decreases so there is a negative relationship.

3. Draw a scatter diagram of the interest rate and the unemployment rate. Describe the relationship.

To make a scatter diagram of the interest rate and the unemployment rate, plot the interest rate on the x-axis and the unemployment rate on the y-axis. The graph will be a set of dots and is shown in Figure A1.6. The pattern made by the dots tells us that when the interest rate increases, the unemployment rate usually decreases so there is a negative relationship.

Use the following news clip to work Problems 4 to 6.

Avengers Shatters More Records:

Movie	Theaters (number)	Revenue (dollars per theater)
Marvel’s The Avengers	4,349	$23,696
Dark Shadows	3,755	$7,906
Think Like a Man	2,052	$2,834
The Hunger Games	2,531	$1,780

Source: Boxofficemojo.com,
Data for weekend of May 11-12, 2012

4. Draw a graph of the relationship between the revenue per theater on the y-axis and the number of theaters on the x-axis. Describe the relationship.

Figure A1.7 shows the relationship. As the figure shows, there is a positive relationship.

5. Calculate the slope of the relationship between 3,755 and 2,052 theaters.

The slope equals the change in revenue per theater divided by the change in the number of theaters. The slope equals ($7,906 - $2,834)/(3,755 - 2,052) which equals $2.98 per theater.

6. Calculate the slope of the relationship between 2,052 and 2,531 theaters.

The slope equals the change in revenue per theater divided by the change in the number of theaters. The slope equals ($2,834 - $1,780)/(2,052 - 2,531) which equals −$2.20 per theater.

7. Calculate the slope of the relationship shown in Figure A1.8.

The slope is -5/4. The curve is a straight line, so its slope is the same at all points on the curve. Slope equals the change in the variable on the y-axis divided by the change in the variable on the x-axis. To calculate the slope, you must select two points on the line. One point is at 10 on the y-axis and 0 on the x-axis, and another is at 8 on the x-axis and 0 on the y-axis. The change in y from 10 to 0 is associated with the change in x from 0 to 8. Therefore the slope of the curve equals -10/8, which equals -5/4.

Use the relationship shown in Figure A1.9 to work Problems 8 and 9.

8. Calculate the slope of the relationship at point A and at point B.

The slope at point A is -2, and the slope at point B is -0.25. To calculate the slope at a point on a curved line, draw the tangent to the curved line at the point. Then find a second point on the tangent and calculate the slope of the tangent.

The tangent at point A cuts the y-axis at 10. The slope of the tangent equals the change in y divided by the change in x. The change in y equals -4 (6 minus 10) and the change in x equals 2 (2 minus 0). The slope at point A is -4/2, which equals -2.

Similarly, the slope at point B is -0.25. The tangent at point B goes through the point (4, 2). The change in y equals 0.5, and the change in x equals -2. The slope at point B is -0.25.

9. Calculate the slope across the arc AB.

The slope across the arc AB is -1.125. The slope across an arc AB equals the change in y, which is 4.5 (6.0 minus 1.5) divided by the change in x, which equals -4 (2 minus 6). The slope across the arc AB equals 4.5/-4, which is -1.125.