Chapter 1

Question 1

Assumptions in one agent economy (3)

Answer 1

1. 2 possible agents / individuals
2. 2 activities
3. No transaction costs or other barriers

Question 2

Model

Answer 2

Model is a simplified representation of reality.

Question 3

Production Possibility Curve (PPC)

Answer 3

all maximum output possibilities for two (or more) goods, given a set of inputs (or resources - i.e., time) if inputs are used efficiently.

Question 4

Efficient Production Point

Answer 4

combination of goods for which currently available resources (i.e. time) do not allow an increase in the production of one good without a reduction in the production of the other. All the points on the PPC are efficient.

Question 5

Inefficient Production Point

Answer 5

combination of goods for which currently available resources (i.e. time) allow an increase in the production of one good without a reduction in the production of the other. All the points below and to the left of the PPC are inefficient.

Question 6

Attainable Production Point

Answer 6

any combination of goods that can be produced with the currently available resources (i.e. time). All the points on the PPC or below and to the left of the PPC are attainable.

Question 7

Unattainable Production Point

Answer 7

any combination of goods that cannot be produced with the currently available resources (i.e. time). All the points that lie outside of the PPC are unattainable.

Question 8

Absolute Advantage

Answer 8

when he/she can carry on this activity with less resources (for example, less time) than another agent.

Question 9

Opportunity Cost

Answer 9

value of the next best alternative to that particular action.

Question 10

Comparative Advantage

Answer 10

when the economy has a lower opportunity cost of carrying on that activity than another agent.

Question 11

Principle of Comparative Advantage

Answer 11

everyone is better off if each agent (or each country) specializes in the activities for which they have a comparative advantage

Question 12

The Low-Hanging Fruit Principle (or Increasing Opportunity Cost)

Answer 12

process of increasing the production of any good, one first employs those resources with the lowest opportunity cost and only once these are exhausted turn to resources with higher cost

Question 13

Consumption Possibility Curve (CPC)

Answer 13

represents all possible combinations that the economy can feasibly consume when it is open to international trade

Question 14

To build the PPC, we proceed in 4 steps…

Answer 14

1. We must first define the axis: record the kg of bananas on the x-axis and the kg of rabbit on the y-axis.
2. Draw the 2 extreme scenarios we talked about before, the ones in which Alberto spends his entire day only collecting bananas or catching rabbits.
3. Note that you are positioning these points either on the x-axis or on the y-axis because one of the goods produced (rabbits and bananas, respectively) is 0.
4. Always the possibility for Alberto to perform both productive activities (i.e., collect bananas and rabbit) and maybe avoid getting bored → plot these combinations.
   connect all the dots you have on your graph so far? → form a straight line → PPC