Lecture #2

Question 1

What is the production possibilities frontier (PPF)

Answer 1

• is the boundary between those combinations of goods and services that can be produced and those that cannot.

Question 2

Any point on the frontier such and any point inside the PPF are…

Answer 2

Attainable

Question 3

Any point outside the PPF are…

Answer 3

unattainable

Question 4

Every choice along the PPF is a…

Answer 4

Tradeoff

Question 5

What does the PPF determine?

Answer 5

opportunity cost

Question 6

define marginal cost

Answer 6

the marginal cost of a good or service is the opportunity cost of producing one more unit of it.

Question 7

define marginal benefit

Answer 7

The marginal benefit of a good or service is the benefit received from consuming one more unit of it.

we measure this by the amount a person is willing to pay for an additional unit.

Question 8

General principle for marginal benefit

Answer 8

• the more we have of any good, the smaller the marginal benefit & the less we are willing to pay for an additional unit.

Question 9

What is production efficiency

Answer 9

When we cannot produce more of any one good without giving up some other good, we have achieved production efficiency. (producing at a point on the PPF)

Question 10

What is allocative efficiency

Answer 10

When we cannot produce more of any one good without giving up some other good that we value more highly, we have reached allocative efficiency (producing at a point on the PPF that we prefer above other points)