Chapter 2

Question 1

Distinguish between comparative and absolute advantage

Answer 1

Comparative advantage:
ability to perform a given task at a lower cost

Absolute advantage:
ability to produce more in the same amount of time or, equivalently, to produce the same amount in less time (Starbucks example in text)

Question 2

Calculate marginal costs of production

Answer 2

Marginal cost:
the additional cost of one more unit (restate the Starbucks example the cost of frappucinos measured in lattes)

Question 3

Define production possibility frontiers

Answer 3

Individual production possibilities frontier (PPF):
graph of the maximum output combinations that an individual can produce with given resources

Question 4

Graph production possibility frontiers. Is the slope positive or negative. What does the slope represent?

Answer 4

negative; marginal cost

Question 5

Calculate costs given production possibility frontiers

Question 6

Graph economy-wide production possibility frontiers (both for two individuals and for multiple resources)

Answer 6

Economy-wide production possibilities frontier:
graph of the maximum output combinations that can be produced by the combined resources of an economy

Question 7

Recognize characteristics of economy-wide production possibility frontiers (both for two individuals and for multiple resources)

Answer 7

The PPF gets steeper as more of “x” is produced

Question 8

Identify changes in the quantity and/or productivity of resources that shift production possibility frontiers

Answer 8

For example, a new machine that increases coffee production probably wouldn’t have the same impact on doughnut production. In that case, only one intercept of the economy-wide PPF would change (the intercept related to maximum coffee production only).

Question 9

Define production efficiency

Answer 9

Production efficiency:
production combinations achieved at the lowest cos

Question 10

Identify points on production possibility frontiers that describe production efficiency, inefficiency, and feasibility

Answer 10

Draw a economy-wide production-possibilities frontier and identify the efficient region, inefficient region and infeasible region.

Question 11

Connect shifts in production possibility frontiers to economic growth

Answer 11

When PPFs shift to the right, production capabilities in the economy are growing. For that reason, when a PPF shifts to the right, we say that economic growth has occurred. Investments in discovering resources, developing new technologies, and encouraging education and training for the labor force all contribute to economic growth. Unfortunately, PPFs can also shift to the left if the quantity of resources available falls or the productivity of those resources falls. The “Reality Check” at the end of this section provides an example of the potential for negative impacts on an economy’s production possibilities.

Question 12

What rules of comparative advantage when comparing two individuals:

Answer 12

Rule #1: If one person has comparative advantage in one task, the other person must have comparative advantage in the other task.

Rule #2: No one can have comparative advantage in every task

Question 13

Define the Point of specialization

Answer 13

Point of specialization:
the point on a production possibilities frontier where each individual is producing only the good in which that individual has a comparative advantage