Economics and Society

Economics and Society

Problem Set #2

1.  Define the following:

a.  Productive Inefficiency

b.  Comparative Advantage

c.  The Law of Increasing Opportunity Costs

d.  Invisible Hand Theorem

2.  What are the two main causes of economic growth?

Combination / Soybeans
(tons) / Handheld
Tablets
A / 1000 / 0
B / 800 / 100
C / 600 / 150
D / 400 / 175

3.  Based on the production possibilities, what is the opportunity cost of producing 800 tons of soybeans instead of 600 tons?

What is the opportunity cost of producing 175 tablets instead of 150 tablets?

4.  Suppose you have the following equation: Y = 18 + 3X, where Y is ice cream sales and X is advertising expenditures.

·  What is the y-intercept?

·  What is the slope?

·  Interpret the slope.

5.  A linear PPF implies what about opportunity costs of production?

6.  If PPF A is the PPF for country A and PPF B is the PPF for country B,

Which country should specialize in agricultural goods?

Which country should specialize in aeronautical goods?

Match each situation below to one of the following curves. Each reflects a different kind of shift. (The axes are left unlabeled on purpose. Manufactured goods and agricultural goods may be placed on either axis.)

A B C D

A meteor hits the world and destroys half the earth’s natural resources. ______

Nanotechnology is perfected that lowers the cost of manufactured goods. ______

Global warming increases the cost of producing agricultural goods. ______

A new technology is developed that doubles the speed at which all

goods can be produced. ______

7.  Robinson has a friend, Friday who can also produce Bread and Cloth. Their production possibilities are as follows:

Robinson / Friday
Bundle / Bread / Cloth / Bundle / Bread / Cloth
A / 20 / 0 / A’ / 8 / 0
B / 18 / 1 / B’ / 7 / 2
C / 15 / 2 / C’ / 6 / 4
D / 11 / 3 / D’ / 5 / 6
E / 6 / 4 / E’ / 0 / 9
F / 0 / 5 / F’ / ___ / ___

A.  Who has the absolute advantage at cloth production?

B.  Who has the absolute advantage at bread production?

C.  Does either one have an absolute advantage in both goods?

D.  Who has the comparative advantage at cloth production?

E.  Who has the comparative advantage at bread production?

F.  If Robinson originally has Bundle D and Friday has Bundle B’ before trading, what are the total quantities of each good produced?

G.  If Robinson and Friday specialize, how much of each product will be produced individually, and in total?

H.  What are the gains from trade?