Question 1

The following table shows output per hour for Fred and Barney who mow lawns and trim hedges:
  What is the opportunity cost of mowing a lawn for Fred? What is the opportunity cost of trimming a hedge for Fred? Who has a comparative advantage in mowing lawns? How can you tell?

Accepted Answer

The opportunity cost of mowing a lawn for Fred is 4 hedges trimmed. The opportunity cost of a trimming a hedge for Fred is 1/4 of a lawn mowed. Fred has a comparative advantage in mowing lawns. His opportunity cost of mowing a lawn is 4 hedges trimmed and Barney's opportunity cost of mowing a lawn is 6 hedges trimmed.

Question 2

Explain the economic concept of opportunity cost.

Accepted Answer

The opportunity cost of something is the best alternative that we give up when we make a choice or a decision.

Question 3

Critically evaluate the following statement. "Only poor nations face scarcity. Rich nations have everything they need and have therefore conquered scarcity."

Accepted Answer

Rich nations simply face different choices than do poor nations. The existence of choices naturally presumes that there is scarcity. Since all resources are limited there is only so many goods and services that can be produced by any nation whether it is poor or rich.

Question 4

What is the opportunity cost of producing capital goods such as a new road?

Accepted Answer

The answer of What is the opportunity cost of producing...

Question 5

What is meant by the marginal rate of transformation?

Accepted Answer

The answer of What is meant by the marginal rate...

Question 6

Suppose that you have saved $100. You can spend it today or you can put it in your savings account for a year and earn 5% interest. What is the opportunity cost of spending the money today?

Accepted Answer

The answer of Suppose that you have saved $100. You...

Question 7

Assume that two countries are considering trading with each other for the first time. Also assume that one of the countries has an absolute disadvantage in producing everything compared to the other country. How would it still be possible for these two nations to benefit from trade with each other?

Accepted Answer

The answer of Assume that two countries are considering trading...

Question 8

Use a graph and comment on the following statement: "If an economy is producing at a point on its production possibilities frontier, it could possibly produce more of one good without giving up any of the other."

Accepted Answer

The answer of Use a graph and comment on the...

Question 9

Explain the difference between absolute advantage and comparative advantage.

Accepted Answer

The answer of Explain the difference between absolute advantage and...

Question 10

Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not?

Accepted Answer

The answer of Because of the quantity and quality of...

Question 11

The following table shows output per hour for Martha and Stewart who make gift baskets and potholders:
  What is the opportunity cost of a gift basket for Martha? What is the opportunity cost of a gift basket for Stewart? Who has a comparative advantage in producing gift baskets? How can you tell?

Accepted Answer

The answer of The following table shows output per hour...

Question 12

Explain how it might be possible to discuss costs of production of a good or service without using monetary values.

Accepted Answer

The answer of Explain how it might be possible to...

Question 13

The following table shows output per hour for Mexico and Canada, two countries that produce beer and T-shirts:
  What is the opportunity cost of a bottle of beer for Mexico? What is the opportunity cost of a T-shirt for Mexico? Who has a comparative advantage in producing beer? How can you tell?

Accepted Answer

The answer of The following table shows output per hour...

Question 14

Assume that yields on bonds (rate of return) begin to fall while the stock market is booming, what should we see happen to the demand and price of stocks and why? What can we say about the opportunity cost of holding on to bonds in this situation?

Accepted Answer

The answer of Assume that yields on bonds (rate of...

Question 15

Papa Ray owns a pizzeria. He is more efficient at making pizza than anyone he could hire. Does this mean that he should make all of the pizzas himself?

Accepted Answer

The answer of Papa Ray owns a pizzeria. He is...

Question 16

Why does the production possibility frontier have a negative slope?

Accepted Answer

The answer of Why does the production possibility frontier have...

Question 17

Evaluate the following statement. "The nation of Berundi has an absolute disadvantage in the production of everything compared to the United States. Therefore, the United States will have no reason to trade with Berundi".

Accepted Answer

The answer of Evaluate the following statement. "The nation of...

Question 18

Suppose that the opportunity cost of a student's time is greater when he studies than when he works. What mistake is he making and why?

Accepted Answer

The answer of Suppose that the opportunity cost of a...

Question 19

Assume that there were decreasing opportunity costs of production in an island economy that only produced two goods. What would the shape of the production possibilities frontier look like and why?

Accepted Answer

The answer of Assume that there were decreasing opportunity costs...

Question 20

If a comparative advantage implies that a country can produce a product at a lower opportunity cost than another country then why do we see two countries often trading the same goods? For instance, for most agricultural products the U.S. has a comparative advantage. Japan, one of America's largest trading partners has a comparative advantage in the production of most economy cars. Explain what is going on here when we still see the U.S. exporting cars to Japan and the U.S. importing some foods from Japan.

Accepted Answer

The answer of If a comparative advantage implies that a...

Exam 2: The Economic Problem: Scarcity and Choice

The following table shows output per hour for Fred and Barney who mow lawns and trim hedges: What is the opportunity cost of mowing a lawn for Fred? What is the opportunity cost of trimming a hedge for Fred? Who has a comparative advantage in mowing lawns? How can you tell?