Chapter 3

Question 1

Comparative Advantage

Answer 1

The ability of one person or nation to produce a good at a lower opportunity cost than another person or nation

Question 2

Absolute Advantage

Answer 2

The ability of one person or nation to produce a product at a lower resource cost than another person or nation

Question 3

Import

Answer 3

A good or service produced in a foreign country and purchased by residents of the home country

Question 4

Export

Answer 4

A good or service produced in the home country and sold in another country

Question 5

Market Economy

Answer 5

An economy in which people specialize and exchange goods and services in markets

Question 6

Centrally Planned Economy

Answer 6

An economy in which a government bureaucracy decides how much of each good to produce, how to produce the good, and who gets the good

Question 7

What are the three reasons productivity increases with specialization?

Answer 7

1. Repetition
2. Continuity
3. Innovation

Question 8

How does the economy accommodate increases in scarcity?

Answer 8

1. Increases prices to encourage efficiency in the use of the product
2. Increase prices to encourage consumers to buy other goods

Question 9

What are causes of market failure?

Answer 9

1. Pollution
2. Public goods: available for everyone to utilize, regardless of who pays and who doesn’t
3. Imperfect information
4. Imperfect competition

Question 10

What is the role of government in a market based economy?

Answer 10

1. Enforce property rights
2. Use legal system to enforce rights
3. Protection of private property
4. Establishing rules of exchange
5. Reducing economic uncertainty and providing for the unemployed