behrendpsu ECON 104 - Economics 104-Chapter 2 Review Questions & Answers

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ANSWERS TO QUESTIONS FOR REVIEWLabor Hours Required to Produce One UnitEconomics 104Chapter 2 Review Questions & AnswersANSWERS TO QUESTIONS FOR REVIEW1. (Opportunity Costs) Discuss the ways in which the following conditions might affect the opportunity costof going to a movie tonight:a. You have a final exam tomorrow.b. School will be out for one month starting tomorrow.c. The same movie will be on TV next week.d. The Superbowl is on TV tonight.a. This greatly increases the opportunity cost. Your opportunity cost includes the ticket price plus thevalue of the loss of study time and loss of sleep that may have a negative effect on your final examgrade tomorrow.b. This significantly lowers the opportunity cost. Your opportunity cost includes the ticket price plus thevalue of any other activity you might have engaged in tonight instead, such as, staying home andwatching TV.c. This leaves the opportunity cost unchanged, but the movie becomes a less attractive alternative.d. This may increase or decrease the opportunity cost, depending on whether or not you are a footballfan. 2. (Opportunity Costs) Determine whether each of the following statements is true or false, or uncertain.Explain your answers:a. The opportunity cost of an activity is the total value of all the alternatives passed up.b. Opportunity cost is an objective measure of cost.c. When making choices, people carefully gather all available information about the costs and benefits ofalternative choices.d. A decision maker seldom knows the actual value of a forgone alternative and therefore must makedecisions based on expected values.a. FALSE. The opportunity cost is the value of only the single best alternative forgone.b. FALSE. Opportunity cost is a subjective measure of cost. Only the individual can estimate theexpected benefits and costs to himself or herself.c. FALSE. Information is gathered only as long as the expected benefits from information gatheringexceed the expected costs. Acquiring information about alternatives is costly and time consuming.Individuals usually make their choices based on limited and incorrect information because that waswhat was available given their time and cost constraints.d. TRUE. For example, you can guess that you will enjoy a movie and then find it too violent for yourtastes.3. (Comparative Advantage) “You should never buy precooked frozen foods because the price you payincludes the labor costs of preparing the food.” Is this conclusion always valid, or can it be invalidated bythe law of comparative advantage?This statement conflicts with the idea of comparative advantage. If your opportunity cost of preparing foodis higher than the cost of buying prepared food, the law of comparative advantage would direct you to buythe product with the lowest opportunity cost. There will be some people with very high time costs (e.g.,surgeons), who will make the decision not to cook. The fact that prepared foods have become popularindicates that they are fulfilling a need. This need arises from the increasing opportunity cost of preparingone’s own food. The increasing opportunity cost is caused by the fact that the value of time to theprofessional person is rising faster than the cost of precooked frozen food. 4. (Specialization and Exchange) Explain how the specialization of labor can lead to increased productivity.People are assigned various tasks according to their individual skills, that is, their comparativeadvantages. Also, people become better at a task the more they practice it; no time is lost in moving fromone task to another. Specialization allows a more efficient organization of the production process and theintroduction of more efficient production methods. With specialization, it is possible for a group of peopleto produce much more than the group could if each person produced the entire product herself or himself.5. (Production Possibilities) Under what conditions is it possible to increase production of one good withoutdecreasing production of another good?An economy can produce more of one good without sacrificing production of another good if it is operatinginside its PPF. The economy is inside the PPF when some resources are idle or when they are allocatedinefficiently. Therefore, production can increase by using more of the idle resources or by allocatingresources more efficiently.6. (Production Possibilities) Under what conditions would an economy be operating inside its PPF? On itsPPF? Outside its PPF?The economy is inside its PPF if some resources are idle (unemployed) or if resources are allocatedinefficiently. An economy is producing on its PPF if all resources are employed efficiently. An economycannot operate outside of its PPF. Points outside the PPF represent unattainable combinations, given theresources, rules of the game, and the technology available. 7. (Shifting Production Possibilities) In response to an influx of undocumented workers, Congress made it afederal offense to hire them. How do you think this measure affected the U.S. production possibilitiesfrontier? Do you think all industries were affected equally? Such a law should cause the PPF to shift inward, because fewer resources would be available to the UnitedStates economy. The more labor-intensive industries, such as agriculture and services, would be hurt themost, especially those requiring unskilled labor. 8. (Production Possibilities) “If society decides to use its resources efficiently (that is, to produce on itsproduction possibilities frontier), then future generations will be worse off because they will not be able touse these resources.” If this assertion is true, full employment of resources may not be a good thing.Comment on the validity of this assertion.The answer to this question depends on how the resources are used. If resources are used to produceconsumer non-durables and if little capital is produced, then future generations will be worse off. Ifsociety’s resources are used to produce capital goods and research, then economic growth in the futurewill be faster, making future generations better off. The key to this question is the realization that most ofsociety’s productive resources are reproducible and that full employment can promote growth.9. (Economic Questions) What basic economic questions must be answered in a barter economy? In aprimitive economy?

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